DSM SINOCHEM PHARMACEUTICALS, Chandigarh V. DCIT, Chandigarh

ITA 438/CHANDI/2015

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 1601 (ITAT-CHANDIGARH)
• Duration Of Justice: 7 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-12-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 24-04-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MANJIT SINGH SH AJAY SHARMA
• Keywords: Capital asset; Depreciation; Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Earning of tax free income; Proportionate interest; Additional evidence; Initiation of penalty proceedings; Royalty expenses; Revenue expenditure; Capital expenditure
• Section: 92C; 43B; 143(3); 92D; 14A; 115JB; 37(1); 10B; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND MS. ANNAPURNA MEHROTRA, ACCOUNTANT MEMBER ITA NO.438/CHD/2015 ASSESSMENT YEAR:2010-11 DSM SINOCHEM PHARMACEUTICALS, VS. THE DCIT INDIA PRIVATE LIMITED CIRCLE-1(1) (EARLIER KNOWS AS DSM ANTI CHANDIGARH INFECTIVES INDIA LIMITED) BHAI MOHAN SINGH NAGAR, TOANSA, DISTRICT NAWANSHAHR PUNJAB PAN NO. AABCM4314K (APPELLANT) (RESPONDENT) APPELLANT BY : SH. K.M. GUPTA, SH. SIDHARTH DADU SH. HARISH BISHT, AND SH. NITIN NARANG RESPONDENT BY : SH. MANJIT SINGH, SH. AJAY SHARMA DATE OF HEARING : 03/09/2015 DATE OF PRONOUNCEMENT : 04/12/2015 ORDER PER ANNAPURNA MEHROTRA A.M. THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF THE DCIT CIRCLE 1(1), CHANDIGARH PASSED U/S 144C(13) R.W.S. 143(3) OF THE INCOME TAX ACT, DATED 25.02.2015. THE ASSESSEE HAS RAISED THE FOLLO WING GROUNDS OF APPEAL. 1. THAT THE LD. AO HAS ERRED BOTH ON FACTS AND IN L AW IN COMPUTING THE LOSS OF THE APPELLANT AT RS.23,72,41,227 AS AGAINST THE RETURNED LOSS OF RS. 50,81,48,052. TRANSFER PRICING MATTERS 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. DISPUTE RESOLUTION PANEL ('DRP') / AO / TRANSFER PR ICING OFFICER ('TPO') ERRED IN DETERMINING/ CONFIRMING THE ARM'S LENGTH PRICE ('AL P') OF CORPORATE SERVICE FEES PAID BY THE APPELLANT TO ITS ASSOCIATED ENTERPRISES CAE'S) AT ONLY 5% OF THE SAID TRANSACTION I.E INR 44,91,480/-, ON AN AD-HOC BASIS AS AGAINST THE TOTAL PAYMENT OF INR 8,98,29,606/-. 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW,, THE DRP / AO / TPO ERRED IN MAKING THE ADJUSTMENT ON ACCOUNT OF CORPORATE SERVICE FEES AND IN DOING SO HAVE GROSSLY : 2 3.1. ERRED IN ALLEGING THAT THE APPELLANT HAS RECEIVED D UPLICATIVE SERVICES UNDER THE CSC ARRANGEMENT. 3.2. ERRED BY HOLDING THAT THERE WAS NO NEED FOR SUCH SE RVICES THEREBY CHALLENGING THE COMMERCIAL WISDOM OF THE APPELLANT IN MAKING SUCH PAYMENTS AND THEREBY PASSING THE ORDER IN CONTRADICTION WITH THE JUDICIAL PRONOUNCEMENTS PRONOUNCED BY VARIOUS COURTS AND TRIBUNALS. 3.3. ERRED BY IGNORING THE COMMERCIAL RATIONALE AND EXPE DIENCY IN AVAILING THE SERVICES FROM THE AES; 3.4. ERRED BY HOLDING THAT THE SERVICES RECEIVED ARE IN THE NATURE OF SHAREHOLDER SERVICES AND NO PAYMENT IS REQUIRED FOR THE SAME. 3.5. ERRED BY NOT APPRECIATING THE EVIDENCE SUBMITTED BY THE APPELLANT AND UNDERTAKING AN ANALYSIS WITH REGARD TO COST OF SERV ICES TO AES AND BENEFITS RECEIVED FROM SERVICES AVAILED. 3-6. ERRED IN HOLDING THAT THE APPELLANT HAS NOT I DENTIFIED PAYMENT FOR EACH AND EVERY SERVICE AND THAT IDENTIFICATION OF SEPARA TE PAYMENT FOR EACH SERVICE IS NECESSARY TO DETERMINE THE ARM'S LENGTH NATURE. 3.7. ERRED IN HOLDING THAT THE COST INCURRED BY AES FOR PROVIDING SERVICES HAVE BEEN ARBITRARILY ALLOCATED TO THE APPELLANT USING F ORMULARY APPORTIONMENT. 3.8. ERRED IN MAKING STATEMENTS IN THE ORDER PASSED UNDE R SECTION 92CA OF THE ACT, BASED ON HIS CONJECTURES AND SURMISES, WHICH A RE NOT IN ACCORDANCE WITH FACTS OF THE CASE, THEREBY MAKING A HIGH PITCHED AS SESSMENT. 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP / AO / TPO ERRED IN HOLDING THAT THE BENCHMARKING DONE B Y THE APPELLANT IN RESPECT OF INTERNATIONAL TRANSACTION RELATING TO PAYMENT TOWAR DS CORPORATE SENDEE FEES IS NOT IN ACCORDANCE WITH THE LAW AND IN DOING SO HAVE GROSSLY ERRED BY: 4.1. DISREGARDING THE ALP, AS DETERMINED BY THE APPELLAN T IN THE TP DOCUMENTATION MAINTAINED BY IT IN TERMS OF SECTION 92D OF THE INCOME TAX ACT.1961 READ WITH RULE 10D OF THE INCOME TAX RULES ,1962; 4.2. REJECTING THE SELECTION OF FOREIGN AE AS TESTED PAR TY BASED ON FRIVOLOUS GROUNDS OF NON-AVAILABILITY OF COMPARABLE DATA FOR FOREIGN ENTERPRISES WITHOUT REJECTING TNMM WHICH WAS ADOPTED TO BENCHMARK THE T RANSACTION PERTAINING TO PAYMENT OF CORPORATE SERVICE CHARGES BY THE APPELLA NT. 4.3. ERRONEOUSLY APPLYING COMPARABLE UNCONTROLLED PRICE ('CUP') METHOD IN CONTRAVENTION OF THE PROVISIONS OF RULE 10B OF THE INCOME TAX RULES, 1962 THE RULES') AND SECTION 92C OF THE ACT. CORPORATE TAX MATTERS 5. THAT THE LD. AO/DRP ERRED ON FACTS & IN LAW IN MAKING A DISALLOWANCE OF RS. 2,08,84,673 OUT OF COMMISSION EXPENSES FOR THE YEAR UNDER CONSIDERATION BASED ON A VIEW FORMED IN THE PRECEDING ASSESSMENT YEARS ON THE FOLLOWING TRANSACTIONS:- 5.1. DISALLOWING SUMS OF RS. 1,16,203 AND RS. 6 3,13,871 PAID AS COMMISSION TO MALACHITE CHEMICALS AND EDWARD KELLER (PHILS) INC. 5.2. DISALLOWING COMMISSION EXPENSE OF RS. 1,4 4,54,599 BEING EXCESSIVE AND UNREASONABLE BY ARBITRARILY FIXING AN AVERAGE RATE OF COMMISSION PAID TO INDIAN AGENTS AT 3%. 6. THAT THE LD. AO/DRP ERRED ON FACTS & IN LAW IN MAKING A DISALLOWANCE OF EXPENDITURE OF RS. 18,82,264 BY INVOKING THE PROVIS IONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES,1962. 6.1. THAT THE LD. AO/DRP ERRED IN PROPOSING AN ADDITION OF LIS. 18,82,264 TO THE BOOK PROFIT U/S 115 JB BY INVOKING THE PROVISIONS O F SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES, 1962. 3 7. THAT THE LD. AO/DRP ERRED ON FACTS & IN LAW IN M AKING A ADHOC DISALLOWANCE OUT OF PERSONNEL AND OPERATING EXPENSE S OF RS. 8,18,69,666 ALLEGING THAT THE SAME HAS BEEN INCURRED AS INDIRECT EXPENSE S ON NEW PROJECT. 7.1. WITHOUT PREJUDICE TO THE ABOVE, THE LD. A O/DRP ERRED IN NOT ALLOWING APPROPRIATE 'AMOUNT OF DEPRECIATION ON THE SAID AMO UNT TREATED TO BE IN THE NATURE OF CAPITAL EXPENDITURE. 8. THAT THE LD. AO/DRP ERRED ON FACTS & IN LAW IN M AKING A DISALLOWANCE OF INTEREST EXPENSES OF RS. 1,56,26,683 ALLEGING THAT THE BORROWED FUNDS WERE UTILISED TO UNDERTAKE THE CAPITAL EXPANSION PROJECT ON SURMI SES AND CONJECTURES. 8.1. WITHOUT PREJUDICE TO THE ABOVE, THE LD. AO/DR P ERRED IN NOT ALLOWING APPROPRIATE AMOUNT OF DEPRECIATION ON THE SAID AMOU NT. 9. THAT THE LD. A.O. / DRP ERRED ON FACTS AND IN L AW IN MAKING A DISALLOWANCE OF RS. 21,03,419 ON THE ALLEGED GROUND THAT EX-GRATIA IS NOT COVERED UNDER SECTION 43B READ WITH SECTION 36(I)(II) OF TH E ACT AND ALSO TREATING THE SAME AS A PRIOR PERIOD EXPENSE. 9.1. WITHOUT PREJUDICE TO THE ABOVE, THE LD. AO/DR P ERRED IN NOT ALLOWING RS. 21,99,742 WHICH HAD BEEN SUO MOTO DISALLOWED BY THE APPELLANT ON ACCOUNT OF NON-PAYMENT, BY APPLYING THE PROVISIONS OF SECTION 43B OF THE ACT. 10. THAT THE LD. AO/DRP ERRED ON FACTS & IN LAW IN MAKING A DISALLOWANCE OF ROYALTY OF RS. 2,53,72,500 INCURRED FOR THE MANUFAC TURING OF ITS PRODUCT 'PURIMOX' TREATING THE SAME TO BE CAPITAL IN NATURE. 11. THAT THE LD. AO/DRP ERRED ON FACTS & IN LAW IN MAKING A DISALLOWANCE OF EXPENDITURE OF RS. 41,84,904 ALLEGING THAT THE APPE LLANT HAS FAILED TO PRODUCE RELEVANT BILLS AND VOUCHERS DURING THE COURSE OF TH E ASSESSMENT PROCEEDINGS. 12. THAT THE LD. AO/DRP ERRED ON FACTS & IN LAW IN MAKING A DISALLOWANCE OF EXPENDITURE OF RS. 1,21,20,940 ALLEGING THAT THE AP PELLANT HAS FAILED TO FILE SATISFACTORY REPLY AND THE SAID BILLS PERTAIN TO EI THER PREVIOUS YEARS OR ARE UNSUPPORTED WITH VOUCHERS. 13. THAT THE LD. AO/DRP ERRED ON FACTS & IN LAW IN MAKING A DISALLOWANCE OF DEPRECIATION OF RS. 11,57,037 ALLEGING THAT CIVIL C ONSTRUCTION WORK SHOULD BE CONSIDERED AS PART OF BUILDING AND NOT PLANT AND MA CHINERY AND THEREFORE ENTITLED TO DEPRECIATION AT LOWER RATE. 14. THAT THE LD. AO/DRP ALSO ERRED IN PROPOSING TO INITIATE PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT FOR CONCEALMENT OF INCOME OR FURNISHING INACCURATE PARTICULARS OF INCOME. 2. BRIEF FACTS RELATING TO THE CASE ARE THAT THE AS SESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING INTERMEDIARIES AND BULK D RUGS, WHICH IS UNDERTAKEN AT THE MANUFACTURING FACILITY OF THE ASSESSEE LOCATED AT TOANSA VILLAGE, DISTT. NAWANSHAHR, PUNJAB. DURING ASSESSMENT PROCEEDINGS I T WAS NOTICED THAT THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTION WITH ASSOCIATED ENTERPRISES FOR AN AMOUNT EXCEEDING 15 CRORES AND THE MATTER WA S REFERRED TO THE TRANSFER PRICING OFFICE FOR DETERMINING THE ARMS LENGTH PRIC E OF THE INTERNATIONAL TRANSACTIONS, WHO MADE AN ADJUSTMENT OF RS. 8,53,38 ,126/- TO THE TRANSACTION 4 AFTER GIVING A RELIEF OF 5% AMOUNTING TO RS. 44,91, 480/- ON THE BASIS OF DRP ORDER. FURTHER CONSIDERING THE ASSESSEES SUBMISSIONS DURIN G ASSESSMENT PROCEEDINGS A DRAFT ASSESSMENT ORDER WAS PASSED ON 26.03.2014. TH EREAFTER THE ASSESSEE APPROACHED THE DRP AND FILED SEVERAL OBJECTIONS IN VIEW OF THE VARIATION IN INCOME PROPOSED IN THE DRAFT ASSESSMENT ORDER. THE LD. DRP-3, NEW DELHI AFTER CONSIDERING THE GROUNDS OF OBJECTIONS OF THE ASSESS EE ISSUED DIRECTION VIDE ORDER NO. FN DRP-3/DEL./2014-15/ 122 DATED 30.12.2014. TA KING THE DIRECTIONS OF HONBLE DRP INTO CONSIDERATION, ASSESSMENT WAS FRAM ED ON THE ASSESSEE VIDE ORDER PASSED U/S 144C(13) R.W.S. 143(3) DATED 25.02 .2015 MAKING ADDITIONS TO THE INCOME OF THE ASSESSEE ON THE FOLLOWING ISSUES. 1. COMMISSION EXPENSES RS. 2,08,84,673/- 2. DISALLOWANCE OF U/S 14A RS.18,82,264/- 3. DISALLOWANCE OF INTEREST ATTRIBUTABLE TO CAPITAL WO RK IN PROGRESS U/S 36(1)(III) OF THE INCOME TAX ACT, RS.1,56,26,683/- 4. CAPITALIZATION OF EXPENDITURE INCURRED ON NEW PROJE CT RS.8,18,69,666/- 5. EX-GRATIA DISALLOWED PERTAINING TO EARLIER YEARS RS . 21,03,419/- 6. ROYALTY RS. 2,53,72,500/- 7. DISALLOWANCE OF EXPENSES CLAIMED WITHOUT SUPPORTING BILLS / VOUCHERS 41,84,904/- 8. ADDITION ON ACCOUNT OF CAPITAL EXPENSE BEING CAPITA L IN NATURE 2,74,084/- 9. DISALLOWANCE OF DEPRECIATION 11,57,037/- 10. ADDITION ON ACCOUNT OF OLD BILLS AND UN-VOUCHED EX PENSES 1,21,20,940/- 11. ADDITION ON ACCOUNT OF TPO ADJUSTMENT RS.8,53,38,1 26/- 3. AGGRIEVED BY THE SAME THE ASSESSEE FILED THE PRE SENT APPEAL BEFORE US. 4. GROUND NO. 1 RAISED BY THE ASSESSEE BEING GENERA L IN NATURE THEREFORE NO ADJUDICATION IS REQUIRED. 5 GROUND NO. 2, 3, AND 4 5. THESE GROUNDS ARE AGAINST THE ADJUSTMENTS MADE I N RELATION TO THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION ENTERED I NTO BY THE ASSESSEE AMOUNTING TO RS. 8,53,38,126/-. 6. BRIEF FACTS RELATING TO THE ISSUE ARE THAT DURIN G THE IMPUGNED ASSESSMENT YEAR, THE ASSESSEE HAD ENTERED INTO VARIOUS INTERNA TIONAL TRANSACTIONS WITH ITS RELATED PARTIES. ONE OF THE TRANSACTION RELATED TO PAYMENT MADE TOWARDS CORPORATE SERVICE CHARGES AMOUNTING TO RS. 8,98,29, 606. THIS PAYMENT WAS MADE TO M/S DSM N.V. DURING AUDIT PROCEEDINGS, THE LEARNED TPO / DRP CHALLENGED THE TRANSACTION PERTAINING TO PAYMENT OF CORPORATE SERVICE CHARGE BY THE ASSESSEE TO ITS A.E. AND DETERMINED THE ARMS LENGTH PRICE OF THE IMPUGNED INTERNATIONAL TRANSACTION AT RS. 44,91,480 /- AGAINST THE SUM OF RS. 8,98,29,606 PAID BY THE ASSESSEE DURING THE IMPUGNE D A.Y. ON ACCOUNT OF THE SAME, ADJUSTMENT WAS MADE TO THE INCOME OF THE ASSE SSEE TO THE AMOUNT OF RS. 8,53,88,126/-. 7. AGGRIEVED BY THE SAME, THE ASSESSEE FILED AN APP EAL BEFORE US. 8. LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE F ACTS IN THE PRESENT CASE WERE IDENTICAL TO THE FACTS IN THE ASSESSES OWN CAS E FOR AY 2007-08 AND 2008-09 WHICH HAVE BEEN DECIDED BY THE HONBLE ITAT IN ITA NO. 1139/CHD/2011 AND 1290/CHD/2012 RESPECTIVELY. LD. AR SUBMITTED THAT T HE TRIBUNAL AFTER GOING THROUGH VARIOUS CONTENTIONS IN THE EARLIER YEAR HAD HELD THAT NO ADJUSTMENT SHOULD BE MADE IN RESPECT OF PAYMENT TOWARDS CORPOR ATE SERVICE CHARGES, SINCE IT WAS FOUND BY THE HONBLE ITAT THAT CORPORA TE SERVICES HAD BEEN RENDERED TO THE ASSESSEE ON ACCOUNT OF WHICH BENEFI TS HAD BEEN DERIVED BY THE ASSESSEE AND FURTHER THAT THE TRANSACTION OF TH E ASSESSEE WAS AT ARMS LENGTH. LD. AR FURTHER SUBMITTED THAT THE HONBLE TRIBUNAL FURTHER HELD IN PARA 110 OF THE AFORESAID ORDER THAT THE AMOUNT PAID FOR CORPORATE SERVICES HAD TO BE REDUCED 6 BY 50% OF THE BENEFIT ARISING ON ACCOUNT OF FINANCI AL SERVICES. LD. AR STATED THAT THIS FINDING WAS CONTRARY TO THE FINDINGS RECORDED IN PARA 95,98 AND 102 OF THE ORDER WHEREIN IT WAS HELD THAT NO ADJUSTMENT SHOULD BE MADE IN RESPECT OF THE PAYMENT MADE TOWARDS CORPORATE SERVICES. LD. AR FUR THER STATED THAT IN THE IMPUGNED AY NO BENEFIT HAD BEEN PASSED TO THE A.E. LD. AR ALSO STATED THAT NO PAYMENT HAD BEEN MADE ON ACCOUNT OF GUARANTEE FEE A ND NO DISALLOWANCE OUGHT TO BE MADE IN THIS RESPECT. LD. AR FURTHER ST ATED THAT IN ANY CASE INCREASE IN SAVINGS CANNOT RESULTED IN INCREASE IN DISALLOWA NCE. LD. AR THEREFORE STATED THAT NO DISALLOWANCE ON ACCOUNT OF CORPORATE SERVIC E CHARGES PAID BY THE ASSESSEE OUGHT TO BE MADE. 9. ON THE OTHER HAND, LD. DR ADMITTED THAT THE ISSU E WAS COVERED BY THE ORDER OF THE TRIBUNAL IN ITA NO. 1139/CHD/2011 AND 1290/CHD/2012 FOR A.Y. 2007- 08 & 2008-09. LD. DR FURTHER STATED THAT IN VIEW OF FINDINGS GIVEN IN PARA 95, 98, 102 & 110 OF THE AFORESAID ORDER THE PAYMENT FOR CO RPORATE SERVICES HAD TO BE DISALLOWED TO THE EXTENT OF 50% OF THE FINANCIAL SE RVICES BENEFIT RECEIVED BY THE ASSESSEE BECAUSE THE ASSESSEE HAD RETAINED ATLEAST 50% OF THE BENEFIT ON ACCOUNT OF SUCH FINANCIAL SERVICES. LD. DR FURTHER POINTED OUT THAT ASSESSEE HAD MOVED A MISCELLANEOUS APPLICATION ALSO IN THIS REGA RD WHICH THE TRIBUNAL HAD REJECTED GIVING THE LOGIC FOR THIS RESTRICTION VIDE PARA 5&6 OF THE APPLICATION ORDER. LD. DR FURTHER SUBMITTED THAT THIS ISSUE HAD BEEN CONSIDERED IN ITS ENTIRETY IN A.Y. 2009-10 ALSO WHERE ON IDENTICAL SET OF FACT S AND AFTER CONSIDERING THE ASSESSES OBJECTION TO THE CONTRARY FINDINGS IN THE ORDER OF AY 2007-08 & 2008-09 AND FURTHER AFTER CONSIDERING THE ORDER PASSED ON A CCOUNT OF MISCELLANEOUS APPLICATION FILED BY THE ASSESSEE FOR THE RELEVANT ASSESSMENT YEAR, HONBLE ITAT HAD UPHELD THE RESTRICTION OF PAYMENT FOR CORPORATE SERVICES RECEIVED TO THE EXTENT OF 50% OF THE BENEFIT RECEIVED BY THE ASSESS EE FROM THESE SERVICES. 7 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE ORDERS OF THE AUTHORITIES BELOW. WE FIND THAT THE ISSUE BEFORE US IS THE ADJUSTMENT MADE ON ACCOUNT OF DETERMINATION OF ALP OF CORPORATE SERVIC ES RECEIVED BY THE ASSESSEE FROM ITS ASSOCIATE ENTERPRISES(AE). WE FIND THAT TH IS ISSUE HAS BEEN ADJUDICATED IN AY 2007-08 AND 2008-09 WHEREIN THE HONBLE TRIBUNAL HELD THAT THE ASSESSEE WAS RECEIVING CORPORATE SERVICES FROM ITS AE'S IN THE A REA OF PRODUCTION AND SALES, MARKET INFORMATION, BUSINESS INTELLIGENCE, SAFETY, HEALTH AND INVESTMENT AND FINANCE RELATED STRATEGIC PLANNING SUPPORT. IT WAS FURTHER HELD BY THE TRIBUNAL THAT NO ADJUSTMENT WAS REQUIRED TO BE MADE IN RESPE CT OF NORMAL CORPORATE SERVICES. WE FIND THAT THE TRIBUNAL FURTHER HELD AT PARA 110 OF ITS ORDER FOR AY 2007-08 AND 2008-09 THAT ON ACCOUNT OF THE FINANCIA L SERVICES RECEIVED BY THE ASSESSEE, REGARDING ISSUANCE OF GUARANTEE AND SANCT IONING OF VARIOUS BANK LIMITS AT LOWER INTEREST RATE, THE PAYMENT ON ACCOU NT OF CORPORATE SERVICES SHOULD BE RESTRICTED UPTO 50% OF THE BENEFIT RECEIV ED ON ACCOUNT OF THESE SERVICES. THEREAFTER, THE ASSESSEE MOVED A MISCELLA NEOUS APPLICATION AGAINST THE ORDER OF THE TRIBUNAL FOR BOTH THE YEAR WHICH W AS ADJUDICATED VIDE MISCELLANEOUS APPLICATION NO. 6&7/CHD/2015 VIDE ORD ER DT. 19/02/2015 DISMISSING THE MISCELLANEOUS APPLICATION FILED. THE ISSUE CAME UP FOR CONSIDERATION IN AY 2009-10 ALSO WHERE IN AFTER TAK ING INTO CONSIDERATION THE ORDER OF THE HONBLE ITAT IN AY 2007-08 AND 2008-09 AND ALSO THE ORDER OF THE HONBLE TRIBUNAL ON THE MISCELLANEOUS APPLICATION F ILED BY THE ASSESSEE AGAINST THE ORDER FOR AY 2007-08 AND 2008-09, THE HONBLE T RIBUNAL GAVE A DIRECTION TO ALLOW PAYMENT ON ACCOUNT OF CORPORATE SERVICES SUBJ ECT TO THE RIDER THAT 50% BENEFIT RECEIVED ON ACCOUNT OF FINANCIAL SERVICES S HOULD BE REDUCED FROM SUCH PAYMENT. THE HONBLE TRIBUNAL HELD AT PARA 12-14 OF ITS ORDE R AS FOLLOWS: 12. FROM THE ABOVE PARAS IT BECOMES CLEAR THAT TH E TRIBUNAL HAS GIVEN A DIRECTION TO BASICALLY ALLOW THE PAYMENT MADE ON AC COUNT OF CORPORATE SERVICES 8 SUBJECT TO THE RIDER THAT 50% BENEFIT RECEIVED ON A CCOUNT OF FINANCIAL SERVICES SHOULD BE REDUCED FROM SUCH PAYMENTS. 13. THIS SITUATION FURTHER BECOMES CLEAR FROM THE CONTENTIONS MADE IN THE SYNOPSIS FILED ON 5.6.2014 IN THIS APPEAL. THE BRIE F SYNOPSIS IN THIS REGARD READS AS UNDER:- THE APPELLANT ALSO SUBMITTED THAT FINANCIAL SERVIC ES FORMING PART OF THE CSC ALSO INCLUDE PROVISIONING OF GUARANTEE(S) BY AE ON BEHALF OF DSP INDIA (PLEASE REFER TO POINT B(III) OF ARTICLE 4 OF THE CORPORATE SERVICE CONTRACT (PLACED AT PAGE 33 OF THE PAPERBOOK). IN THIS REGARD, THE ASSESSEE HAS ALSO SUBMITTED THE DETAILS OF AN UNCONDITIONAL AND IRREVOCABLE GUARANTEE PROVIDED BY DSM N.V., AN AE OF DSM INDIA, TO THE BANK (CITIBANK INTERNATIONAL PLC. ) ON BEHALF OF DSM INDIA AMOUNTING TO EURO 10 MILLION (APPROX 68 CRORES) IN CONNECTION WITH ANY OVERDRAFT, LOAN, CREDIT FACILITY ETC. IN THIS REGARD, A COPY O F THE LETTER PROVIDING THIS INTER- COMPANY GUARANTEE FACILITY TO DSM INDIA HAS ALSO BE EN SUBMITTED BY THE ASSESSEE TO THE LD. TPO AS APPENDIX 6B TO THE SUBMI SSION DATED AUGUST 16, 2012 (PLACED AT PAGES 300 TO 303 OF PAPERBOOK). FURTHERM ORE A LETTER BY ROYAL BANK OF SCOTLAND, PROVIDING THE DETAILS OF CREDIT FACILITIE S EXISTING FOR DSM INDIA IN VARIOUS FINANCIAL YEARS WHEREIN SECURITY HAS BEEN PROVIDED BY KONINKLIJKE DSM NV, WAS ALSO SUBMITTED WITH THE LD. TPO AS APPENDIX 6 TO TH E SUBMISSION DATED SEPTEMBER 17,2012(PLACED AT PAGE 338 OF THE PAPERBO OK). THE DETAILED BENCHMARKING REPORT ALONG WITH CREDIT RATING ANALYSIS IS PROVIDED AS APPENDIX 2. IT IS RESPECTFULLY SUBMITTED THAT AS PER THE ANALYSIS CONDUCTED BY THE APPELLANT, THE CREDIT RATING WAS CALCULATED IN A SCIENTIFIC MANNER AND THE SAME WAS DETERMINED AT B3. THE RESULTS OF THE AFORESAID BENCHMARKING ARE AS UN DER:- NATURE OF FACILITY AMOUNT OF FACILITY EQUIVALENT IN R GUARANTEE FEE BENEFIT TO THE APPELLANT(INR IN CR) PACKING CREDIT EUR TO MILLION 68 CRORES 2.56% 1.7 4 LC/GUARANTEE EUR 30 MILLION 204 CRORES 3.50% 7.14 TOTAL 8.88 YOUR HONOUR WOULD APPRECIATE FROM THE ABOVE THAT TH E SERVICES AVAILED BY DSM INDIA RESULTED IN BENEFIT TO THE ASSESSEE AND I NDEED ADDED ECONOMIC AND COMMERCIAL VALUE TO THE BUSINESS OF THE ASSESSEE. I N CASE THESE SERVICES WERE NOT PROVIDED BY THE AES THE ASSESSEE WOULD HAVE LEFT WI TH NO CHOICE BUT TO PAY AN INDEPENDENT ENTERPRISE (THIRD PARTY) FOR THE ACTIVI TY PERFORMED FOR IT OR WOULD HAVE PERFORMED THE ACTIVITY IN HOUSE FOR ITSELF. 14. THE ABOVE ALSO CLEARLY SHOWS THAT HOW ASSESSEE HAS RECEIVED THE FI NANCIAL SERVICES WHICH HAVE LED TO THE BENEFITS TO THE ASSE SSEE TO THE TUNE OF RS. 8.88 CRORES. THEREFORE, WE SET ASIDE THE ORDER OF ASSESS ING OFFICER AND DIRECT HIM TO RE- COMPUTE THE AMOUNT OF ADJUSTMENT BY REDUCING 50% OF RS. 8.88 CRORES FROM THE TOTAL CORPORATE SERVICE CHARGES I.E. RS. 7,99,31,74 1/- MINUS RS. 4.44 CRORES (I.E. 50% OF RS. 8.88 CRORES) I.E. (RS. 7,99,31,741 RS. 4,4 4,00,000) = RS. 3,55,31,741/-. THE ASSESSING OFFICER MAY ALSO EXAMINE THE AMOUNT OF BE NEFIT CALCULATED BY THE ASSESSEE AND VERIFY THE AMOUNT IF THE CONCLUSION IS DIFFERENT, THE ASSESSING OFFICER MAY DECIDE THE ISSUE ACCORDINGLY. OTHERWISE ADJUSTM ENT SHALL BE MADE FOR RS. 3,55,31,741/-. 9 ADMITTEDLY THE FACTS IN THE PRESENT CASE ARE IDENTI CAL TO THOSE IN THE PRECEDING YEAR I.E; 2007-08, 2008-09 AND 2009-10 WHEREIN DISA LLOWANCE ON ACCOUNT OF CORPORATE SERVICES WAS MADE FOR THE SAME REASON AS IN THE IMPUGNED ASSESSMENT YEAR. SINCE THIS ISSUE HAS ALREADY BEEN ADJUDICATED UPON BY THE HONBLE TRIBUNAL IN THE PRECEDING YEAR, RESPECTFULL Y FOLLOWING THE SAME IN THE IMPUGNED ASSESSMENT YEAR ALSO, WE REMIT THE MATTER BACK TO THE FILE OF THE AO AND DIRECT HIM TO COMPUTE THE ALP OF THE CORPORATE SERVICES CHARGE PAID BY REDUCING 50% OF THE BENEFIT IF ANY RECEIVED BY THE ASSESSEE FROM THE FINANCIAL SERVICES RECEIVED. THE AO IS DIRECTED TO EXAMINE TH E AMOUNT OF BENEFIT AS CALCULATED BY THE ASSESEE AND THEREAFTER DECIDE THE ISSUE AS PER THE DIRECTION GIVEN. 11. THIS GROUND OF APPEAL OF THE ASSESSE IS PARTLY ALLOWED. GROUND NO.5 12. THIS GROUND RAISED BY THE ASSESSEE IS AGAINST T HE DISALLOWANCE OF COMMISSION EXPENSES AMOUNTING TO RS. 2,08,84,673/- 13. BRIEF FACTS RELATING TO THE CASE ARE THAT DURIN G THE YEAR THE ASESSEE HAD DEBITED AN AMOUNT OF RS. 82.33 MILLION UNDER THE HE AD COMMISSION. DURING ASSESSMENT PROCEEDINGS THE ASSESSEE SUBMITTED DETAI LS OF COMMISSION PAID DURING THE YEAR BIFURCATING THE SAME BETWEEN COMMIS SION PAID TO INTERMEDIARIES OUTSIDE INDIA, PAYMENTS TO DISTRIBUT ORS OUTSIDE INDIA AND COMMISSION PAID IN EXCESS OF 3% OF SALES. FURTHER T HE ASSESSEE SUBMITTED THAT IN THE PAST DISALLOWANCE OF COMMISSION EXPENSES PAID I N EXCESS OF 3% HAD BEEN MADE, ALLEGING THAT THE SAME ARE EXCESSIVE AND FURT HER COMMISSION PAID TO PARTIES TO WHOM SALES WERE MADE WERE ALSO DISALLOWE D. THE ASSESSEE SUBMITTED THAT WITH RESPECT TO THE COMMISSION PAID IN EXCESS OF 3%, THE TEST APPLIED BY THE A.O. WAS ARBITRARY AND NOT SUPPORTED BY ANY POSITIV E EVIDENCE. THE ASSESSEE SUBMITTED THAT THE COMMISSION PAID TO VARIOUS PARTI ES VARIED SINCE THERE WERE 10 VARIOUS FACTORS WHICH WENT TO MAKE A SALE OF A PROD UCT. DEPENDING UPON THE TERRITORY, PRODUCT PRICE, REALIZATION PER UNIT, DIF FICULTY IN REALIZATION OF DEBTORS AND NATURE OF END CUSTOMERS DIFFERENCE SCALES OF COMMIS SION TO AGENTS IN DIFFERENT COUNTRIES AND DIFFERENT AREAS HAD BEEN FIXED BY THE ASSESSSEE. THE ASSESSEE THEREFORE, SUBMITTED THAT THE ENTIRE COMMISSION EXP ENSES WERE ALLOWABLE IN ACCORDANCE WITH THE PROVISION OF SECTION 37(1) OF T HE INCOME TAX ACT. IN SUPPORT OF ITS ABOVE CONTENTION THE ASSESSEE PLACED RELIANC E ON THE DECISION OF THE APEX COURT IN CIT VS. WALCAND AND CO. P. LTD. (1997 ) 65 ITR 381 (SC), SASOON J. DAVID & CO. P. LTD. VS. CIT 1997 118 ITR 261 (SC), SA BUILDERS LTD. VS. CIT(A) AND ORS. 288 ITR 1 (SC), AND VARIOUS OTHER DECISIONS OF THE HIGH COURT AND THE TRIBUNAL. THE ASSESSEE FURTHER SUBMITTED THAT THE P AYMENT OF SALE COMMISSION IN EXCESS OF 3% TOTALLY UNRELATED TRANSACTION HAD BEEN CONSIDERED TO BE NORMAL BY THE HONBE DELHI HIGH COURT IN THE CASE OF ROLLS ROYS & CO. VS. CIT (TS-515-SC- 2011) (DEL.). AS FOR THE COMMISSION PAID TO THE DIS TRIBUTORS THE ASSESSEE SUBMITTED THAT THE SAME ACTUALLY REPRESENTED DISCOUNT GIVE BY THE ASSESSEE TO DISTRIBUTORS. THE ASSESSEE STATED THAT IN CERTAIN CASES IN ORDER TO CONTROL OR MANAGE RISK IN FOREIGN TERRITORY WHICH IS THERE IN SELLING GOODS D IRECTLY TO THIRD PARTY CUSTOMERS, THE ASSESSEE SOLD GOODS TO DISTRIBUTORS WHO IN TURN SOLD THE GOODS TO THE THIRD PARTIES. THUS THROUGH THIS METHOD THE ASSESSEE SUBM ITTED, IT WAS ENSURED THAT ITS GOODS WERE SOLD TO ITS END CUSTOMERS OUTSIDE THE CO UNTRY WITH MINIMAL RISK OF ANY PAYMENT / DEBT TURNING BAD. TO MAKE THIS ARRANGEMEN T ACCEPTABLE TO THE DISTRIBUTOR, DISCOUNT WAS OFFERED TO THEM, WHICH WA S TURNED AS COMMISSION AND BOOKED IN THE ACCOUNT OF THE ASSESSEE, LD. A.O. AFT ER CONSIDERING THE ASSESSEES SUBMISSIONS HELD THAT AN IDENTICAL ISSUE HAD ARISEN IN THE ASSESSMENT PROCEEDING IN A.Y. 2006-07, 2007-08, 2008-09 AND 2009-10, WHER EIN THE COMMISSION PAYMENTS WERE DISALLOWED FOR THE REASON THAT THE ASSESSEE HA D NOT FILED ANY CONFIRMATION FROM THE COMMISSION AGENT NOR ANY WRITTEN AGREEMENT REGARDING PAYMENT OF COMMISSION. IT WAS ALSO HELD THAT NATURE OF SERVICE S RENDERED BY THE COMMISSION 11 AGENTS TO THE ASSESSEE WERE ALSO NOT CLEAR. THUS, T HE COMMISSION EXPENSES WERE DISALLOWED IN THE ABSENCE OF ANY COGENT MATERIAL TO SUBSTANTIATE THE CLAIM OF THE SAME. FURTHER PAYMENT OF COMMISSION IN EXCESS O F 3% WAS DISALLOWED FOR THE REASON THAT IT WAS FOUND TO BE UNREASONABLY HIGH. L D. A.O. FURTHER FOUND THAT IN THE PRECEDING YEARS THE ADDITION HAS BEEN CONFIRMED BY THE DRP. FOLLOWING THE SAME, LD. A.O. FOUND THAT IN THE IMPUGNED ASSESSMEN T YEAR ALSO THE ASSESSEE HAD NOT FILED ANY EVIDENCE TO SUBSTANTIATE TO ITS C LAIM OF COMMISSION PAID AND IN VIEW OF THE SAME PROPOSED DISALLOWANCE OF COMMIS SION EXPENSE AMOUNTING TO RS. 1,16,203/- AND RS. 63,13,871/- PAID TO MALAC HITE CHEMICALS AND EDWARD KELLER (PHILS) INC. ON THE GROUND THAT TRANSACTIONS WITH THEM WERE ON PRINCIPAL TO PRINCIPAL BASIS AND FURTHER DISALLOWED AN AMOUNT OF RS. 1,44,54,599/- BEING COMMISSIONS PAID IN EXCESS OF 3%. THE PROPOSED ADDI TION WAS DISPUTED BEFORE THE DRP WHO UPHELD THE DISALLOWANCE BY HOLDING AT P ARA 3.7 OF THEIR ORDER AS FOLLOWS:- THE DRP HAS TAKEN NOTE OF THE ABOVE FACTS. THE DRP SUSTAINED THE DISALLOWANCE IN AY 2007-08, AY 2008-09 AND AY 2009-10. AS THE MA TTER WAS UNDER CONSIDERATION FOR EARLIER YEARS BEFORE THE HIGHER APPELLATE AUTHO RITIES AND HAD NOT REACHED FINALITY, THE DRP RESPECTFULLY DOES NOT FEE INCLINE D TO INTERVENE IN THE MATTER AT THIS STAGE. THEREFORE, THE OBJECTION IS REJECTED. FOLLOWING THE SAME, LD. AO MADE DISALLOWANCE OF COM MISSION EXPENSES OF RS. 2,08,84,673/-. 14. BEFORE US LD. COUNSEL FOR THE ASSESSEE FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AO / DRP AND FURTHER SU BMITTED THAT THIS ISSUE HAD BEEN DECIDED BY THE TRIBUNAL IN EARLIER YEARS AND C OMMISSION PAID TO FOREIGN PARTIES HAD BEEN REMANDED BACK TO THE A.O. FOR FRES H ADJUDICATION AFTER ESTABLISHING THE RELATIONSHIP WITH THE PARTIES. LD. AR FURTHER SUBMITTED THAT THE PAYMENT MADE TO MALACHITE CHEMICALS AND EDWARD KELL ER (PHILS) INC. IN THE IMPUGNED YEAR WAS IN THE CAPACITY AS AGENT/INTERMED IARY ONLY AND NOT AS DISTRIBUTOR. LD. AR DREW OUR ATTENTION TO THE DETAI L OF COMMISSION PAID, FILED DURING ASSESSMENT PROCEEDINGS, PLACED AT PB 928-930 , REFLECTING THE AFORESTATED 12 FACT. LD. AR FURTHER PLACED BEFORE US COPIES OF CER TIFICATES FROM MALACHITE CHEMICALS AND EDWARD KELLER (PHILLS) INC. ALONGWITH SUPPORTING INVOICES AS ADDITIONAL EVIDENCE OF PAYMENT OF COMMISSION TO THE M ON PRINCIPAL TO AGENT BASIS. FURTHER AN APPLICATION FOR ADMISSION OF ADDI TIONAL EVIDENCES WAS ALSO FILED BEFORE US. LD. AR ARGUED THAT THE COMMISSION PAID T O FOREIGN PARTIES WAS THEREFORE FULLY ALLOWABLE. LD. AR FURTHER POINTED T HAT THE DOMESTIC COMMISSION WAS FULLY ALLOWABLE AS PER THE ORDER OF THE HONBLE TRIBUNAL IN EARLIER YEARS. LD. AR THEREFORE PLEADED THAT THE ISSUE MAY BE DECIDED IN TERMS OF ORDERS PASSED IN A.Y. 2006-07 . ON THE OTHER HAND LD. DR SIMPLY S UPPORTED THE ORDER OF AO. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE OR DERS OF THE AUTHORITIES BELOW AND ALSO THE DOCUMENTS PLACED BEFORE US. 15. ON THE ISSUE OF ADMISSION OF ADDITIONAL EVIDENC ES FILED BEFORE US WE FIND THAT NO JUSTIFIABLE REASON HAS BEEN MADE OUT FOR AD MISSION OF THE SAME IN TERMS OF RULE 29 OF THE APPELLATE TRIBUNAL RULES. WE ARE THEREFORE NOT PERSUADED TO ADMIT THE ADDITIONAL EVIDENCES FILED BY THE ASSESSE E BEFORE US. FURTHER WE FIND THAT THE ISSUE OF DISALLOWANCE OF C OMMISSION EXPENSES HAS BEEN ADJUDICATED UPON IN ASSESSES CASE IN AY 2006-07, AN D THE SAME HAS BEEN FOLLOWED IN SUBSEQUENT YEARS UPTO AY 2009-10. IN TH E ORDER FOR AY 2006-07 IN ITA NO. 1455/CHD/2010, THE HONBLE TRIBUNAL, WHILE ADJU DICATING THE ISSUE, HAS HELD AT PARA 86-87 OF THE ORDER AS FOLLOWS: WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE RAISED VIDE GROUND NO. 4 IS AGAINST THE DISALLOWANCE OF CO MMISSION EXPENSES TOTALING RS.96.15,144/-. DURING THE YEAR UNDER CONSIDERATION , THE ASSESSEE HAD CLAIMED TOTAL EXPENDITURE OF RS.2.60 CRORES UNDER THE HEAD 'COMMISSION '. THE SAID COMMISSION INCLUDED BOTH COMMISSION PAID ON ACCOUNT OF EXPORTS AND ALSO THE COMMISSION PAID ON DOMESTIC SALES. 'THE CASE OF THE REVENUE IS THAT THE ASSESSEE HAD MADE SALES TO CERTAIN PARTIES, TO WHOM COMMISSI ON WAS ALSO PAID AND THE SAME BEING NOT RELATABLE TO THE BUSINESS OF THE ASS ESSEE, WAS NOT TO BE ALLOWED AS AN EXPENDITURE. HOWEVER, THE CASE OF THE ASSESSE E BEFORE US IS THAT THE SAID COMMISSION HAS BEEN PAID AGAINST THE PURCHASE ORDER S BOOKED BY THE SAID CONCERN, WHO WERE ENGAGED IN TRADING AND WERE ALSO COMMISSION AGENTS. THE TWO TRANSACTIONS WERE CLAIMED TO BE DIFFERENT AND W ITHOUT ANY CONNECTION TO EACH OTHER. THE ASSESSEE HAS PLACED ON RECORD THE D ETAILS OF COMMISSION PAID AT PAGES 291 & 292 OF THE PAPER BOOK. THE ABOVESAID DE TAILS REFLECT COMMISSION ON 13 EXPORT SALES PAID OF RS.105.63,783/- AND DOMESTIC C OMMISSION OF RS.I55.27.I36/-. THE ASSESSEE HAD FURTHER FURNISHED THE DETAILS OF T HE PARTIES ALONGWITH THE RATES OF COMMISSION, SALES MADE TO THE SAID PARLIES AND THE TOTAL COMMISSION PAID TO THE SAID PARTIES, WHICH ARE PLACED AT PAGES 293 AND 294 OF THE PAPER ROOK. AS AGAINST THE EXPORT COMMISSION, THE ASSESSEE HAD PAI D A SUM OF RS.695.475/- ON SALES OF RS.2.35 CRORES TO M/S EDWARD KELLER @ 2.95 0%. FURTHER COMMISSION OF RS.40.97.199/- ON SALE VALUE OF RS.13.80 CRORES HAS BEEN PAID TO P.I. MENSANGAN SAKTI. THE NEXT ITEM OF PAYMENT IS TO M/S MALACHITE CHEMICALS, WHICH AS PER THE ASSESSEE IS RS.885.880/- ON SALE VALUE OF RS.2.98 C RORES @ RS.2.966%. THE ASSESSING OFFICER HAS ADOPTED THE COMMISSION PAID TO M/S MALA CHITE CHEMICALS AT RS.455.257/-. THE CASE OF THE ASSESSEE BEFORE US IS THAT THE COMMISSION AGENTS ARE ALSO TRADERS OF THE DRUGS AND ARE ALSO ACTING AS CO MMISSION AGENTS. THE ASSESSEE IS ENGAGED IN THE MANUFACTURE OF INTERMEDIARIES AND BULK DRUGS, WHICH IN TURN ARE UTILIZED BY OTHER CONCERNS FOR THE PREPARATION OF T HE FINAL PRODUCTS. THE ASSESSEE, THROUGH THE SAID COMMISSION AGENTS HAD SOLD THE ITE MS MANUFACTURED BY IT TO DIFFERENT CONCERNS. THE ASSESSEE HAS PLACED ON RECO RD THE CONFIRMATION FROM P.I. MENSANGAN SAKTI IN RESPECT OF RECEIPT OF COMMISSION OF RS.40,97.199/-. THE SAID CERTIFICATE IS PLACED AT PAGES 305 OF THE PAPER BOO K. WE FIND MERIT IN THE CASE OF THE ASSESSEE. HOWEVER, THE NECESSARY DETAILS IN THI S REGARD ARE NOT AVAILABLE, IN PARTICULAR THE PLEA OF THE ASSESSING OFFICER THAT T HE ASSESSEE HAD MADE SALES TO THE SAID PARTIES ON WHICH COMMISSION HAD BEEN PAID. WE, THEREFORE, REMIT THIS ISSUE TO THE FILE OF ASSESSING OFFICER TO VERIFY TH E CLAIM OF THE ASSESSEE THAT THE COMMISSION PAID TO THE SAID CONCERN HAD NO CONNECTI ON WITH THE SALES MADE TO THE SAID CONCERNS AND IF THE CONTENTION OF THE ASSE SSEE IS FOUND TO BE CORRECT, THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE CLAIM OF EXPENDITURE, BOOKED ON ACCOUNT OF COMMISSION PAID ON EXPORT SALES. REASONA BLE OPPORTUNITY OF HEARING SHALL BE AFFORDED TO THE ASSESSEE TO PUT FORWARD IT S CONTENTIONS. IN VIEW THEREOF, THIS ISSUE IS SET ASIDE TO THE FILE OF ASSESSING OF FICER WITH OUR DIRECTIONS. ' THE SECOND ASPECT OF IHE CLAIM OF EXPENDITURE UNDER THE HEAD 'COMMISSION' RELATES TO THE COMMISSION PAID ON DOMESTIC SALES. T HE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD PAID COMMISSION AT VARYING RA TES STARTING FROM ABOUT 1% TO 5%. THE ASSESSEE HAS FILED ON RECORD THE DETAILS OF THE ABOVE SAID COMMISSION TOTALING RS. 155,27,136/-THE ASSESSEE HAS TABULATED THE NAMES OF THE PARTIES ALONGWIIH THE DETAILS OF SAME VALUE OF SALES, COMMI SSION PAID AND THE RATES AT WHICH PAID. THE PERUSAL OF THE SAID DETAILS REFLECT THE COMMISSION @ 4.48% BEING PAID TO M/S ACE CORPORATION. THE TOTAL AMOUNT PAID TO THE SAID PARTY IS RS.135J,250/-. THE ASSESSING OFFICER, ON THE OTHER HAND, VIDE PARA 5.12 HAS NOTED THAT THE COMMISSION TO THE SAID PARTY HAS BEEN MADE @ 6.6% VIDE PARA 5.12 AT PAGE 32 OF THE ASSESSMENT ORDER. THE ASSESSEE. ON T HE OTHER HAND, HAS FURNISHED THE DETAILS OF COMMISSION AT PAGES 291 AND 292 OF T HE PAPER BOOK IN WHICH THE COMMISSION TO M/S ACE CORPORATION HAS BEEN SHOWN AT RS. 13,51,250/-. WE ARE IN CONFORMITY WITH THE SUBMISSION OF THE ASSESSEE THAT THE RATE OF COMMISSION PAID FOR THE TRANSACTION CANNOT BE INTERFERED BY THE ASS ESSING OFFICER AS IT IS THE UNDERSTANDING BETWEEN THE PARTIES AT THE RELEVANT T IME WHICH DETERMINES THE RATE OF COMMISSION TN BE PAID ON A PARTICULAR TRANS ACTION. IN VIEW THEREOF, WE REVERSE THE ORDER OF ASSESSING OFFICER IN RESTRICTI NG THE RATE OF COMMISSION TO 3% . IN ANY CASE, THE SAID RESTRICTION WAS MADE BY THE ASSE SSING OFFICER OBSERVING THAT THE RATE OF COMMISSION PAID BY THE ASSESSEE WAS 6.6 % WHEREAS THE ASSESSEE CLAIMS THAT IT HAD PAID COMMISSION @ 4.48%. THE OTH ER TWO PARLIES TO WHOM COMMISSION HAD BEEN PAID BY THE ASSESSEE AND THE SA ME HAS BEEN RESTRICTED BY THE ASSESSING OFFICER ARE M/S INTEGRATED TECHNOLOGY AND M/S AAKAAR ENGINEERING & MANUFACTURING CO. THE COMMISSION TO THE SAID PART IES, AS ALLEGED BY THE ASSESSING OFFICER ARE PAID @ 6.90% AND 6.76% RESPEC TIVELY. IN LINE WITH OUR OBSERVATIONS HEREIN ABOVE, WE FIND NO MERIT IN THE DISALLOWANCE MADE BY THE ASSESSING OFFICER RESTRICTING TO RATE OF COMMISSION TO 3% AS AGAINST THE RATES AGREED UPON BETWEEN THE PARTIES. REVERSING THE ORDE R OF THE ASSESSING OFFICER, WE DELETE THE ADDITION OF RS.42.77,213/-. THE GROUN D NO. 4 RAISED BY THE ASSESSEE IS. THUS PARTLY ALLOWED. ' 14 FOLLOWING THE ABOVE ORDER WE SET ASIDE THE ISSUE RE GARDING PAYMENT OF COMMISSION TO MALACHITE CHEMICALS AND EDWARD KELLER (PHILS) INC. AMOUNTING TO RS. 1,16,203/- AND RS. 6,31,3871/- RESPECTIVELY TO THE FILE OF THE A.O. FOR REEXAMINATION IN TERMS OF THE DIRECTION CONTAIN IN PARA 86 OF THE ORDER TRIBUNAL FOR A.Y. 2006-07. THE GROUND OF APPEAL OF THE ASSES SE ON THIS ISSUE IS THEREFORE ALLOWED FOR STATISTICAL PURPOSES. FURTHER AS FAR AS DISALLOWANCE OF COMMISSION PAID IN EXCESS OF 3% IS CONCERNED, WE DELETE THE A DDITION FOLLOWING THE ORDER OF TRIBUNAL VIDE PARA86-87 FOR A.Y. 2006-07. THIS ASP ECT IS DECIDED IN FAVOUR OF THE ASESSEE. 16. THIS GROUND OF APPEAL OF THE ASSESSEE IS THEREF ORE ALLOWED IN ABOVE TERMS. GROUND NO.6 & 6.1 17. THESE GROUNDS RAISED BY THE ASSESSEE IS AGAINST THE DISALLOWANCE OF EXPENDITURE OF RS. 18,82,264/- U/S 14A OF THE INCOM E TAX ACT, 1961 READ WITH RULE 8D OF THE INCOME TAX RULES 1962 AND ALSO ADJUSTMENT ON ACCOUNT OF THE SAME TO THE BOOK PROFIT OF THE ASSESSEE U/S 115JB OF THE AC T. 18. BRIEF FACTS RELATING TO THE CASE ARE THAT AS PE R THE RECORDS, IT WAS FOUND THAT THE ASSESSEE WAS HAVING INVESTMENTS OF RS.50 M ILLION IN THE SHARES OF HINDUSTAN MAX GB LTD., WHICH WAS WRITTEN OFF IN EAR LIER YEARS BY WAY OF A BOOK ENTRY. LD. A.O. OBSERVED THAT THE COMPANY THOUGH H AD WRITTEN OFF THE INVESTMENT IN ITS BOOKS, IT WAS STILL HOLDING THE S AME AS ON 31.03.2010. ON BEING CONFRONTED WITH SAME THE ASSESSEE SUBMITTED THAT NO DISALLOWANCE U/S 14A WAS WARRANTED SINCE THE INVESTMENTS IN THE IMPUGNED SHA RES WERE MADE BY THE COMPANY IN THE YEAR 1996 WHILE THE INTEREST EXPENSE S INCURRED DURING THE YEAR PERTAINED TO LOAN FUNDS TAKEN IN THE F.Y. 2003-04 A ND LATER YEARS AND WHICH WERE USED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSE E COMPANY. THE ASSESSEE STATED THAT CLEARLY THE INTEREST EXPENSE INCURRED B Y THE ASSESSEE DURING THE IMPUGNED ASSESSMENT YEAR DID NOT RELATE TO THE INVE STMENTS MADE BY THE 15 ASSESSEE IN HINDUSTAN MAX GB LTD. THE ASSESEE FURTH ER STATED THAT THERE WAS NO NEXUS BETWEEN THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE DURING THE IMPUGNED ASSESSMENT YEAR AND THE INVESTMENT IN HIND USTAN MAX GB LTD. AND ACCORDING NO DISALLOWANCE U/S 14A COULD BE MADE. TH E ASSESSEE ALSO SUBMITTED THAT THE INTEREST EXPENSE INCURRED BY THE ASSESSEE RELATED TO FOREIGN CURRENCY TERM LOAN WHICH WAS TAKEN ON 22.02.2006, F OREIGN CURRENCY TERM LOAN FROM DSM FINANCE B.V., NETHERLAND TAKEN ON 02.06.20 03 AND SHORT TERM LOANS TAKEN FOR WORKING CAPITAL PURPOSE FROM CITY BANK / RBS BANK. THE ASSESSEE THEREFORE, STATED THAT NO EXPENDITURE HAD BEEN INCU RRED BY THE ASSESSEE FOR THE PURPOSE OF EARNING EXEMPT INCOME AND HENCE NO DISAL LOWANCE U/S 14A COULD BE MADE. THE ASSESSEE PLACED RELIANCE ON THE DECISI ON OF JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. HERO CYCLES 323 ITR 51 8 (P&H), CIT VS. WINSOM TEXTILE INDUSTRIES LD. 316 ITR 204 (P&H) AND VARIOUS OTHER DECISIONS OF THE TRIBUNAL IN SUPPORT OF ITS ABOVE CONTENTION. 19. LD. A.O. INTERPRETING THE PROVISIONS OF SECTION 14A OF THE I NCOME TAX ACT, HELD THAT ALL EXPENDITURE WHETHER DIRECT OR INDIREC T INCURRED IN RELATION TO AN INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME HAD TO BE DISALLOWED U/S 14A REGARDLESS OF THE FACT THAT POSITIVE EXEMPT INC OME HAD BEEN EARNED OR NOT. LD. A.O. FURTHER STATED THAT SOME EXPENDITURE IS AL WAYS INCURRED FOR EARNING AN INCOME AND IT IS NOT POSSIBLE THAT ONE CAN EARN EX EMPT INCOME WITHOUT INCURRING ANY EXPENSES AT ALL. RELYING UPON A NUMBE R OF DECISIONS AND FURTHER APPLYING THE RATIO OF P&H IN THE CASE ABHISHEK IND USTRIES 286 ITR 1. LD. A.O. HELD THAT INTEREST EXPENSES WERE TO BE DISALLOWED U/S 14 A AS PER RULE 8D(II) WHICH WAS WORKED OUT AT RS. 16,32,264/- AND FURTHER DISAL LOWANCES OF A SUM OF RS. 2,50,000 WAS WORKED OUT UNDER RULE 8D (2)(III), THU S WORKING OUT A TOTAL DISALLOWANCE U/S 14A OF RS. 18,82,264/-. FURTHER LD . A.O. OBSERVED THAT IN THE PRECEDING A.Y.S 2006-07 TO 2009-10 IN THE ASSESSEE S OWN CASE THE DRP-1, NEW DELHI HAD CONFIRMED THE ADDITION MADE ON THIS ACCOU NT. FOLLOWING THE SAME LD. 16 A.O. PROPOSED A DISALLOWANCE OF RS. 18,82,264/- U/S 14A OF THE INCOME TAX ACT. THE ASSESSEE DISPUTED THE DISALLOWANCE BEFORE THE H ONBLE DRP WHO VIDE PARA 4.19 OF THE ORDER UPHELD THE DISALLOWANCE AS FOLLOW S:- THE DRP HAS CAREFULLY CONSIDERED THE FACTS OF THE CASE. THE DRP IS NOT INCLINED TO INTERFERE IN THE MATTER FOLLOWING ITS OWN PRECEDENT S SET FOR EARLIER YEARS. ACCORDINGLY, FOLLOWING THE DIRECTIONS ISSUED IN THE ABOVE REGARD BY THE DRP FOR ASSESSMENT YEARS 2009-10,2008-09, 2007-08 AND 2006- 07 THE OBJECTION OF THE APPLICANT IS REJECTED . LD. A.O. FOLLOWING THE DIRECTION OF THE DRP MADE A DISALLOWANCE OF RS. 18,82,264/- U/S 14A AND ADDED THE SAME TO THE INCOM E OF THE ASSESSEE. 20. BEFORE US, LD. COUNSEL FOR THE ASSESSEE SUBMITT ED THAT THIS ISSUE HAS BEEN DECIDED IN THE ASSESSEES OWN CASE FOR A.Y. 2006-07 TO 2008-09 WHEREIN THE IMPUGNED DISALLOWANCE WAS DELETED BY THE HONBLE IT AT. LD. AR FURTHER SUBMITTED THAT THE ORDER OF THE ITAT IN A.Y. 2006-0 7 HAS ALSO BEEN AFFIRMED BY THE HONBLE P&H HIGH COURT VIDE THEIR ORDER IN ITA NO. 118 OF 2014(O&M), DATED 28.11.2014. LD. DR ON THE OTHER HAND PLACED RELIANC E ON THE ORDER OF THE ASSESSING OFFICER / DRP. 21. AFTER CONSIDERING THE SUBMISSIONS MADE WE FIND THAT THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASESSEE VIDE THE ORDER OF HONBLE P&H HIGH COURT IN ITA NO. 118/2014, DATED 28.11.2014 WHEREIN IT HAS BEEN HELD AS FOLLOWS:- THE LAST TWO QUESTIONS PERTAIN TO THE APPLICABILIT Y OF SECTION 14A OF THE INCOME TAX ACT. THE LEARNED TRIBUNAL HAS AFTER A DETAILED CONSIDERATION OF THE MATERIAL ON RECORD HELD AS FOLLOWS:- 'THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSING OFFICER FROM THE BALANCE-SHEET NOTED THE INVESTMENT OF RS.5 CRORES I N SHARES OF M/S HINDUSTAN MAX-GB LTD. THE SAID INVESTMENT WAS MADE IN THE EAR LIER YEARS ON WHICH THE ASSESSEE WAS EARNING INTEREST. WHILE DECIDING GROUN D NO. 3 OF THE PRESENT APPEAL, WE HAVE DELIBERATED UPON THE ISSUE OF DISAL LOWANCE OF INTEREST RELATABLE TO SUCH ADVANCES MADE BY THE ASSESSEE ON WHICH AS P ER THE ASSESSING OFFICER, NO INTEREST WAS CHARGED AS AGAINST THE INTEREST EXP ENDITURE INCURRED BY THE ASSESSEE. IT IS AN ADMITTED POSITION THAT THE ASSES SEE WAS RECEIVING INTEREST ON THE SAID ADVANCES. THE SAID INVESTMENT WAS MADE FOR BUS INESS PURPOSES I.E. FOR THE PURCHASE OF RAW MATERIAL FROM THE SAID CONCERN. HOW EVER, AS THE SAID CONCERN WAS IN FINANCIAL CONSTRAINT, THE APPLICATION WAS MA DE BEFORE THE BIFR BY THE SAID CONCERN AND THEREAFTER, NO INTEREST WAS BEING CHARG ED BY THE ASSESSEE ON THE SAID ADVANCES. ADMITTEDLY, THE SAID INVESTMENT WAS NOT MADE DURING THE YEAR UNDER CONSIDERATION, AS IS APPARENT FROM THE FACT THAT TH E ISSUE OF DISALLOWANCE OF INTEREST UNDER SECTION 36(1)(III) OF THE ACT IN REL ATION TO THE SAID ADVANCE, AROSE 17 BEFORE THE TRIBUNAL IN ASSESSMENT YEAR 2006-04 AND THEREAFTER. IN THE TOTALITY OF THE ABOVESAID FACTS AND CIRCUMSTANCES, WE ARE OF TH E VIEW THAT NO DISALLOWANCE IS WARRANTED UNDER SECTION 14A READ WITH RULE 8D OF IT RULES AS THE SAID INVESTMENT HAD BEEN MADE BY THE ASSESSEE IN A JOINT VENTURE FOR BUSINESS EXPEDIENCY. ACCORDINGLY, WE DIRECT THE ASSESSING OF FICER TO DELETE THE ADDITION OF RS. 12,40,501/-. GROUND NO. RAISED BY THE ASSESS EE IS THUS, ALLOWED.' A PERUSAL OF THESE FINDINGS REVEALS THAT AFTER FAIL ING TO INCLUDE THE ALLEGED INTEREST RECEIVED BY THE ASSESSEE UNDER SECTION 36(L) (III) OF THE ACT, THE ASSESSING OFFICER HAS BY A SLEIGH OF HAND MADE AN ATTEMPT TO PLACE TH IS INCOME UNDER SECTION 14A OF THE ACT. ADMITTEDLY THE INVESTMENT WAS MADE IN THE YEAR 1996 AND THOUGH THE ASSESSEE MAY HAVE RECEIVED INTEREST AND DIVIDEND AT ONE STAGE BUT FOR THE LAST OVER A DECADE M/S HMGV IS BEFORE BIFR AND HAS NOT BEEN PAYING ANY INTEREST TO THE ASSESSEE. THE INVESTMENT AS IS APPA RENT FROM THE FACTS WAS MADE AS A BUSINESS EXPEDIENCY TO PROCURE RAW MATERIAL MA NUFACTURED BY M/S HINDUSTAN MAX GB LTD. THE INCOME TAX APPELLATE TRIB UNAL, THEREFORE, RIGHTLY DELETED THE ADDITION MADE BY THE ASSESSING OFFICER, UNDER SECTION 14A OF THE ACT. THE FOURTH AND FIFTH QUESTIONS ARE ALSO ANSWERED AG AINST THE REVENUE. IN VIEW OF THE ABOVE WE, FIND THAT ON IDENTICAL SET OF FACTS THE HONBLE HIGH COURT HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESS EE. FOLLOWING THE SAME WE DELETE THE ADDITION MADE BY THE LD. A.O. U/S 14A OF THE INCOME TAX ACT, AMOUNTING TO RS. 18,82,264/-. FURTHER, SINCE THE DI SALLOWANCE MADE U/D 14A HAS BEEN DELETED NOTHING REMAINS FOR MAKING ADJUSTMENT TO THE BOOK PROFITS U/S 115JB IN RESPECT OF SECTION 14A. THEREFORE ADJUSTME NT MADE TO THE BOOK PROFIT ON ACCOUNT OF DISALLOWANCE U/S 14A IS ALSO DELETED. 22. THIS GROUND OF APPEAL OF THE ASSESEE IS THEREFO RE ALLOWED. GROUND NO.7 : 23. THIS GROUND RAISED BY THE ASSESSEE IS AGAINST T HE DISALLOWANCE OUT OF PERSONAL AND OPERATING EXPENSES OF RS 8,18,69,666/- HOLDING THE SAME TO BE INDIRECT EXPENSES ON NEW PROJECT AND HENCE CAPITAL IN NATURE. ALTERNATIVELY THE ASSESSEE HAS AGITATED AGAINST THE NON ALLOWANCE OF DEPRECIATION ON THE SAID AMOUNT TREATED AS CAPITAL EXPENDITURE. 24. BRIEF FACTS RELATING TO THE ISSUE ARE THAT DURI NG THE IMPUGNED ASSESSMENT YEAR THE ASSESSEE HAD INCURRED EXPENSES ON NEW PROJ ECT. THE A.O. FOUND THAT THE ASSESSEE HAD CAPITALIZED ONLY DIRECT EXPENSES O N FIXED ASSETS, THOUGH IT HAD INCURRED BOTH DIRECT AND INDIRECT EXPENSE. REFERRIN G TO THE NOTES TO THE ACCOUNT TO THE BALANCE SHEET AT POINT NO. XIII, THE A.O. STATED THAT THE ASSESSEE 18 HAD ITSELF ADMITTED THAT ONLY EXPENSE, WHICH INCREA SED THE VALUE OF FIXED ASSETS HAD BEEN CAPITALIZED, WHILE OTHER INDIRECT EXPENSE HAD NOT BEEN CAPITALIZED. THE A.O. HELD THAT SINCE NO BIFURCATION OF THE EXPE NSES INCURRED ON NEW PROJECT HAD BEEN GIVEN BY THE ASSESSEE, INDIRECT EXPENSES F OR THE IMPUGNED PERIOD HAD NOT BEEN ALLOCATED TO THE NEW PROJECT. THE A.O. THEREFORE, ALLOCATED THE INDIRECT EXPENSES IN THE RATIO OF GROSS ASSETS AND COMPUTING THE SAME AT RS. 8,18,69,666/- PROPOSED A DISALLOWANCE OF THE SAME U /S 37 OF THE INCOME TAX ACT. THE ASSESSEE DISPUTED THE PROPOSED ADDITION BE FORE THE HONBLE DRP, WHO UPHELD THE DISALLOWANCE MADE. FOLLOWING THE DIRECTION OF THE DRP, LD. A.O. ENHANC ED THE INCOME OF THE ASSESSEE BY RS. 8,18,69,666/- ON THIS ACCOUNT. AGGR IEVED BY THE SAME THE ASSESSEE FILED THE PRESENT APPEAL BEFORE US. 25. BEFORE US LD. COUNSEL FOR THE ASSESSEE CONTENDE D THAT THE ASSESSEE HAD CAPITALIZED BOTH DIRECT AS WELL AS INDIRECT EXPENDI TURE FOR UNDERTAKING CAPITAL EXPANSION PROJECT DURING THE YEAR. LD. AR CONTENDED THAT ALL DIRECT AND INDIRECT EXPENSE WHICH INCREASED THE VALUE OF THE ASSET BEYO ND ITS ORIGINAL STANDARD OF ITS PERFORMANCE HAD BEEN CONSIDERED FOR THE PURPOSE OF CAPITALIZATION IN THE PROJECT COST. LD. AR DREW OUT ATTENTION TO PAGE NO. 1137 OF THE PAPER BOOK, WHICH WAS A CERTIFICATE OF THE TOTAL COST INCURRED IN THE TABLA PROJECT OF THE ASSESSEE UPTO 31.03.2010 AMOUNTING TO RS.29,15,41,3 62.65. IT WAS FURTHER CERTIFIED THAT THE PROJECT CAPITALIZED ON 05.09.2009. LD. AR FURTHER CONTENDED THAT IT WAS ONLY EXPANSION OF EXISTING BUSINESS WHICH HAD BEEN UNDERTAKE DURING THE YEAR. IT WAS FURTHER STATED BY THE LD. AR THAT THE A.O. M ISREAD NOTE NO. XIII IN THE NOTES TO THE ACCOUNTS APPENDED TO THE BALANCE SHEET . LD. AR STATED THAT EVEN AS PER NOTE NO. XIII BOTH DIRECT AND INDIRECT EXPEN SES INCURRED FOR UNDERTAKING CAPITAL EXPANSION PROJECT DURING THE YEAR HAD BEEN CAPITALIZED DURING THE YEAR. 19 LD. AR DREW OUR ATTENTION TO PAGE NO. 117 OF THE PA PER BOOK WHERE NOTE NO. XIII WAS REPRODUCED AS FOLLOWS:- (XIII) EXPENDITURE ON NEW PROJECTS AND SUBSTANTIAL EXPANSION ALL DIRECT CAPITAL EXPENDITURE ON EXPANSION IS CAPI TALISED. AS REGARDS INDIRECT EXPENDITURE ON EXPANSION, ONLY THAT PORTION IS CAPI TALIZED WHICH REPRESENTS THE MARGINAL INCREASE IN SUCH EXPENDITURE INVOLVED AS A RESULT OF CAPITAL EXPANSION. BOTH DIRECT AND INDIRECT EXPENDITURE ARE CAPITALISE D ONLY IF THEY INCREASE THE VALUE OF THE ASSET BEYOND ITS ORIGINAL STANDARD OF PERFORMANCE. THUS, LD. AR POINTED OUT THAT THE AO. HAD MISREAD N OTE NO. XIII AND WHEREIN IT WAS CLEARLY MENTIONED THAT BOTH DIRECT AND INDIRECT EXPENSE HAD BEEN CAPITALIZED IN THE PROJECT COST. LD. AR FURTHER STATED THAT WHILE CALCULATING THE IN DIRECT EXPENSE TO BE APPORTIONED TO THE PROJECT COST, THE LD. A.O. HAD T AKEN THE ENTIRE PERSONNEL EXPENSES AMOUNTING TO RS. 29,36,0000/- AND THE TOTA L OPERATING EXPENSES AMOUNTING TO RS. 90,30,90000/- INTO CONSIDERATION. LD. AR CONTENDED THAT THE AFORESAID EXPENSE INCLUDED THE ASSESSES REGULAR DAY TO DAY BUSINESS EXPENDITURE AND COULD NOT BE CONSIDERED AS HAVING B EEN INCURRED ON THE NEW PROJECT. LD. AR ALSO CONTENDED THAT WHILE ALLOCATIN G THE INDIRECT EXPENSES TO THE NEW PROJECT BY APPLYING A GROSS ASSET RATIO THE A.O . HAD TAKEN THE ADDITION ON ACCOUNT OF NEW PROJECT AT RS. 32,61,70000/- WHICH I N FACT REPRESENTED THE ADDITION MADE IN ALL THE ASSET DURING THE YEAR AND DID NOT REPRESENT THE ADDITION MADE TO THE CAPITAL EXPANSION ONLY. LD. AR DREW OUR ATTENTION TO PAGE 107 OF THE PAPER BOOK, WHERE THE SCHEDULE-IV TO THE BALANCE SHEET OF THE ASSESSEE COMPANY REPRESENTING THE FIXED ASSET CHART WAS REPRODUCED SHOWING ADDITION MADE IN ALL THE BLOCKS OF THE ASSETS TOTAL ING 326.17 CRORES. LD. AR FURTHER SUBMITTED THAT THE EXPENDITURE ACTUALLY INCURRED BY THE ASSEESSE IN TABLA PROJECT AMOUNTED TO RS. 29,15,41,362/- ONLY AND THU S, EVEN AS PER THE LD. A.O.S CALCULATION THE AMOUNT OF INDIRECTLY EXPENSE TO BE ATTRIBUTED TO THE CAPITAL PROJECT WAS ON THE HIGHER SIDE. LD. AR FURTHER CONT ENDED THAT ALTERNATIVELY EVEN IF THE INDIRECT EXPENSES ARE CAPITALIZED TO THE EXP ANSION PROJECT DEPRECIATION 20 OUGHT TO BE ALLOWED ON THE SAME SINCE THE PROJECT H AD BEEN COMPLETED AND CAPITALIZED ON 05.09.2009. LD. AR FURTHER PLACED RE LIANCE ON THE FOLLOWING CASE LAWS IN SUPPORT OF ITS ABOVE CONTENTION JAY ENGINEERING WORK LTD. VS. CIT DELHI-III, 311 IT R 405 (DEL. )[2007], CIT VS. OSWAL SPINNING AND WEAVING MILLS LD. [1986] 160 ITR 426 ( P&H), CIT VS. SAKTHI SUGAR LTD. 339 ITR 400 (CHENNAI)(HC) , ALEMBIC GLASS INDUSTRIE S LTD. [1976] 103 ITR 715 (GUJ )(HC), INDO RAMA SYNTHETIC LTD. VS. CIT 333 ITR 18 (DEL.), CIT VS. MONNET INDUSTRIES LTD. 2009 176 TAXMANN 81 (DELHI), KESORAM INDUSTRIE S VS. CIT [1992] 196 ITR 845 , CIT V. ASHOKA MARKETING LTD. [1990] 181 ITR 493 (CA L.)(HC) , CIT VS. JAMSHEDPUR ENG. AND MACHINE MANUFACTURING CO. LTD. [1986] 157 ITR 730 (PATNA)(HC) 26. LD. DR ON THE OTHER HAND PLACED RELIANCE ON THE ORDER OF THE A.O. 27. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS ON RECORD PLACED BEFORE US. THE ISSUE BEFORE US IS THE DETERMINATION OF THE NAT URE OF INDIRECT EXPENSES, WHETHER CAPITAL OR REVENUE BASED ON THE FACTS BEFOR E US. THE CARDINAL RULE IS THAT THE QUESTION WHETHER A CE RTAIN EXPENDITURE IS ON CAPITAL OR REVENUE ACCOUNT SHOULD BE DECIDED FROM THE PRACT ICAL AND BUSINESS VIEW PART AND IN ACCORDANCE WITH SOUND ACCOUNTANCY PRINC IPLES. IT IS TRITE LAW ALSO THAT THE TEST FOR IDENTIFYING AN EXPENDITURE AS TO WHETHER IT IS REVENUE OR CAPITAL IS AS UNDER : 1. IF THE AMOUNT SPENT WAS FOR THE PURPOSE OF BRI NGING INTO EXISTENCE A NEW ASSET OR OBTAINING A NEW ADVANTAGE, IT WOULD BE A C APITAL EXPENDITURE. 2. IF ON THE OTHER HAND, IT IS NOT MADE FOR THE PUR POSE OF BRINGING INTO EXISTENCE ANY SUCH ASSET OR ADVANTAGE BUT FOR RUNNI NG THE BUSINESS OR WORKING IT WITH A VIEW TO PRODUCE THE PROFITS, IT I S A REVENUE EXPENDITURE. KEEPING THE ABOVE IN MIND, WE FIND THAT IN THE PRES ENT CASE THE CONTENTION OF THE ASSESSEE IS THAT IT HAD UNDERTAKEN EXPANSION OF ITS EXISTING BUSINESS DURING THE YEAR. NOTE NO. (XIII) IN THE NOTES TO THE ACCOU NTS, WHICH IS PART OF THE 21 BALANCE SHEET OF THE ASSESSEE, SUBSTANTIATES THIS F ACT. WE FIND THAT THIS CONTENTION OF THE ASSESSEE HAS NOT BEEN REBUTTED BY THE AO / DRP. IN THE BACKDROP OF THIS FACT INDIRECT EXPENDITURE INCURRED ARE TO BE TREATED FOR THE PURPOSE OF CARRYING ON BUSINESS OF THE ASSESSEE AND HENCE ALLOWABLE. WE FIND THAT THE DECISION RENDERED BY THE CALCUTTA HIGH COU RT IN THE CASE OF KESORAM INDUSTRIES & COTTON MILLS LTD. VS. CIT (1992) 196 I TR 854 SQUARELY APPLIES TO THE ASSESSEE CASE WHERE IN IT WAS HELD AS FOLLOWS: THE PRINCIPLES ARE WELL-SETTLED. IT CANNOT BE DIS PUTED THAT IF THE EXPENSES ARE INCURRED IN CONNECTION WITH THE SETTING UP OF A NEW BUSINESS, SUCH EXPENSES WILL BE ON CAPITAL ACCOUNT. BUT WHERE THE SETTING UP DOE S NOT AMOUNT TO STARTING OF A NEW BUSINESS BUT EXPANSION OR EXTENSION OF THE BUSI NESS ALREADY BEING CARRIED ON BY THE ASSESSEE, EXPENSES IN CONNECTION WITH SUCH E XPANSION OR EXTENSION OF THE BUSINESS MUST BE HELD TO BE DEDUCTIBLE AS REVENUE E XPENSES . ONE HAS TO CONSIDER THE PURPOSES OF THE EXPENDITURE AND ITS OB JECT AND EFFECT. THE FINDING OF THE TRIBUNAL IN THIS CASE IS THAT THERE WAS AN EXPA NSION OR EXTENSION OF THE EXISTING BUSINESS OF THE ASSESSEE. THE ASSESSEE IS A MANUFAC TURER OF CEMENT. IN ADDITION TO ITS FACTORY IN ANDHRA PRADESH, IT PROPOSED TO START ANOTHER CEMENT FACTORY IN RAJASTHAN. THERE IS ONE BUSINESS. ALTHOUGH THE FACT ORY AT RAJASTHAN WAS NOT SET UP IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEA R, THIS FACT, IN OUR VIEW, IS NOT A RELEVANT FACTOR IN DETERMINING WHETHER THE DEDUCTIO N IS ALLOWABLE OR NOT. THE EXPENSES IN THIS CASE ARE MISCELLANEOUS EXPENSES AN D LEGAL CHARGES FOR THE PROPOSED CEMENT FACTORY PROJECT. THIS EXPENDITURE I S NOT RELATED TO THE SETTING UP OF A NEW FACTORY, IT PERTAINS TO EXPLORING THE FEAS IBILITY OF EXPANDING OR EXTENDING THE EXISTING BUSINESS BY SETTING UP A NEW FACTORY I N THE SAME LINE OF BUSINESS. THE ASSESSEE, DURING THE COURSE OF ITS BUSINESS, MAY IN CUR EXPENDITURE FOR OBTAINING A PROJECT REPORT OR LEGAL OPINION REGARDING THE VIABI LITY OF SUCH PROJECT. THIS CANNOT, IN OUR VIEW, BE CONSIDERED AS CAPITAL EXPENDITURE A S, IN THAT CASE, ANY LEGAL EXPENSES INCURRED BY AN ASSESSEE FOR TAKING ANY OPI NION ON THE DESIRABILITY OR FEASIBILITY OF EXPANSION OF THE BUSINESS WILL NOT B E ALLOWABLE AS DEDUCTION. SUCH EXPENDITURE IS UNMISTAKABLY CONNECTED WITH THE RUNN ING OF THE BUSINESS. IN VIEW OF THE ABOVE IT IS HELD THAT INDIRECT EXPEN SES WOULD CONSTITUTE REVENUE EXPENDITURE ONLY AND WOULD NOT BECOME CAPITAL MEREL Y FOR THE REASON THAT SUCH EXPANSION WAS TERMED AS NEW PROJECT. THEREFORE WE HOLD THAT THE TREATMENT GIVEN BY AO TO THE SUM OF RS. 8,18,69,666 /- AS CAPITAL IS NOT IN ACCORDANCE WITH LAW AND IS HEREBY REVERSED. THE CAL CULATION MADE BY AO IN THIS REGARD IS INCONSEQUENTIAL. 28. THIS GROUND OF APPEAL OF THE ASSESSEE IS THEREF ORE ALLOWED. 22 GROUND NO. 8 29. THIS GROUND RAISED BY THE ASSESSEE IS AGAINST D ISALLOWANCE OF INTEREST EXPENSES ON ACCOUNT OF CAPITAL EXPANSION. 30. BRIEF FACTS OF THE CASE ARE THAT DURING ASSESSM ENT PROCEEDINGS IT WAS NOTICED THAT THERE WAS AN OUTSTANDING CAPITAL WORK IN PROGRESS AS ON 31/03/2010 OF RS. 7.09 MILLION AND FURTHER IT WAS FOUND THAT T HE ASSESSEE HAD PAID TOTAL INTEREST OF RS. 123.78 MILLION ON LOAN OF RS. 1537. 77 MILLION. THE ASSESSEE WAS ASKED WHY PROPORTIONATE INTEREST SHOULD NOT BE CAPITALIZE D. IN RESPONSE ASSESSEE FILED VARIOUS DETAILS AND EXPLANATION WHICH WERE REJECTED BY THE AO WHO THEREAFTER PROPOSED DISALLOWANCE OF PROPORTIONATE INTEREST IN TERMS OF PROVISIONS OF SECTION 36(1)(III) AMOUNTING TO RS. 1,56,26,683/- BY HOLDIN G THAT THE SAME WAS REQUIRED TO BE CAPITALIZED. THE HONBLE DRP UPHELD THE SAME AND THE DISALLOWANCE WAS ACCORDINGLY MADE BY THE AO. 31. BEFORE US LEARNED COUNSEL FOR THE ASSESSEE PLEA DED THAT NO INTEREST BEARING FUNDS HAD BEEN USED FOR UNDERTAKING CAPITAL EXPANSION PROJECT DURING THE YEAR. LD. AR STATED THAT THE ASSESSEE HAD USED ITS INTERNAL WORKING CAPITAL AND SELF GENERATED FUNDS FOR UNDERTAKING CAPITAL EX PANSION PROJECT DURING THE YEAR. LD. AR DREW OUR ATTENTION TO PAPER BOOK PAGE NO. 916 WHICH WAS THE CASH FLOW STATEMENT OF THE ASSESSEE FOR THE YEAR, TO SHO W THAT THERE WERE ENOUGH OWN FUNDS WITH THE ASSESSEE FOR UNDERTAKING THE CAP ITAL EXPANSION. LD. AR ALSO REFERRED TO THE AUDITORS REPORT AT PAGE NO. 102 OF THE PAPER BOOK WHEREIN IT WAS STATED THAT NO FUNDS RAISED ON SHORT TERM BASIS HAD BEEN USED FOR LONG TERM INVESTMENT. LD. AR FURTHER STATED THAT ALL LONG TER M LOANS APPEARING IN THE BOOKS OF ASSESSEE WERE TAKEN IN EARLIER YEAR AND ALL INTE REST PERTAINING TO THE AMOUNT UTILISED FOR CAPITAL EXPANSION PURPOSES HAD BEEN DU LY CAPITALIZED TOWARDS THE FIXED ASSETS IN THE RELEVANT YEARS. LD. AR FURTHER SUBMITTED THAT DURING THE IMPUGNED ASSESSMENT YEAR THE ASSESSEE COMPANY HAD UNDERTAKEN CAPITAL 23 EXPANSION PROJECTS TO THE TUNE OF RS. 7.09 MILLION OUT OF WHICH THE CREDITORS OUTSTANDING IS AT BALANCE SHEET DATE AMOUNTED TO RS . 1.62 MILLION. LD. AR STATED THAT IN EFFECT THE CASH OUTLAY ON ACCOUNT OF CAPITA L WORK IN PROGRESS DURING THE YEAR WAS RS. 5.47 MILLION AS AGAINST WHICH THE ASSE SSEE HAD SUFFICIENT CASH AMOUNTING TO RS. 661.52 MILLIONS FOR MAKING THE IMP UGNED PAYMENTS. LD. AR DREW OUR ATTENTION TO THE CASH FLOW STATEMENT FOR T HE YEAR SHOWING THAT EVEN AFTER PAYMENT ON ACCOUNT OF CAPITAL WORK IN PROGRES S AND OTHER PAYMENTS THE ASSESSEE HAD CLOSING CASH BALANCE OF 121.12 MILLION . LD. AR THEREFORE PLEADED THAT PROPORTIONATE DISALLOWANCE OF INTEREST WAS NOT JUSTIFIED. LD. AR FURTHER STATED THAT THIS ISSUE HAS ALSO BEEN DECIDED BY THE TRIBUN AL IN AY 2009-10 WHEREIN THE HONBLE TRIBUNAL AGREED WITH THE ASSESSEES CONTENT ION THAT WHERE NO PARTICULAR LOAN HAS BEEN TAKEN FOR THE ASSET SHOWN OR CAPITAL WORK IN PROGRESS, NO DISALLOWANCE U/S 36(1)(III) WOULD BE MADE. 32. LD. DR ON THE OTHER HAND RELIED UPON THE ORDER OF THE AO. 33. WE HAVE HEARD THE RIVAL CONTENTION AND PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND THE DOCUMENTS PLACED BEFORE U S. WE FIND THAT ON IDENTICAL SET OF FACTS THE HONBLE TRIBUNAL HAS ADJ UDICATED THIS ISSUE IN AY 2009-10 AND HAS HELD THAT IN THE ABSENCE OF NEXUS BETWEEN I NTEREST BORROWING FUNDS AND INVESTMENT IN CAPITAL WORK IN PROGRESS, NO DISA LLOWANCE U/S 36(1)(III) CAN BE MADE. THE HONBLE TRIBUNAL HAS FURTHER REMITTED TH E ISSUE BACK TO THE FILE OF THE AO FOR VERIFICATION OF UTILIZATION OF INTEREST BEAR ING LOANS. THE HONBLE TRIBUNAL AT PARA 33 OF THE ORDER HAS HELD AS FOLLOWS WHILE DECI DING THE ISSUE. 33. AFTER CONSIDERING THE RIVAL SUBMISSIONS PRINC IPALLY WE FIND FORCE IN THE SUBMISSIONS OF LD. COUNSEL FOR THE ASSESSEE THAT IF NO PARTICULAR LOAN HAS BEEN TAKEN FOR THE ASSET WHICH HAS BEEN SHOWN UNDER THE HEAD CAPITAL WORK IN PROGRESS THEN DISALLOWANCE COULD NOT HAVE BEEN MAD E. HOWEVER, EACH LOAN AND ITS UTILIZATION REQUIRES FRESH EXAMINATION, THE REFORE, WE REMAND THIS ISSUE TO THE FILE OF ASSESSING OFFICER WITH A DIRECTION TO ASCER TAIN DETAILS OF VARIOUS LOANS AND HOW THEY WERE FULLY UTILIZED AND THEN ONLY DECIDE T HE ISSUE IN ACCORDANCE WITH LAW. 24 RESPECTFULLY FOLLOWING THE SAME WE HOLD THAT NO DIS ALLOWANCE U/S 36(1)(III) CAN BE MADE IF NO LOAN HAS BEEN TAKEN FOR INVESTMENT IN CAPITAL WORK IN PROGRESS, AND FURTHER FOR THE VERIFICATION OF THIS FACT, WE R EMIT THE MATTER BACK TO THE FILE OF THE AO WITH A DIRECTION TO ASCERTAIN THE UTILIZATIO N OF VARIOUS LOANS TAKEN BY THE ASSESSEE AND THEREAFTER DECIDE THE ISSUE IN ACCORDA NCE WITH LAW. 34. THIS GROUND OF APPEAL OF THE ASSESSEE IS THEREF ORE ALLOWED. GROUND NO. 9: 35. THIS GROUND RAISED BY THE ASSESSEE IS AGAINST T HE DISALLOWANCE OF RS. 21,03,419/- BEING EX-GRATIA PAID BY THE ASSESSEE AN D CLAIMED AS A DEDUCTION U/S 43B R.W.S. 36(1)(II) OF THE ACT. THE ASSESEEE HAS ALSO RAISED THE GROUND THAT ALTERN ATIVELY IT SHOULD HAVE BEEN ALLOWED DEDUCTION ON ACCOUNT OF EX-GRATIA PROVIDED DURING THE YEAR AMOUNTING TO RS. 21,99,742/-, WHICH HAD BEEN SUO M OTO DISALLOWED BY THE ASSESSEE ON ACCOUNT OF NON-PAYMENT, BY APPLYING THE PROVISIONS OF SECTION 43B OF THE ACT. 36. BRIEF FACTS RELATING TO THE ISSUE ARE THAT DURI NG THE IMPUGNED ASSESSMENT YEAR THE ASSESSEE HAD CLAIMED DEDUCTION OF RS. 21,0 3,419/- FROM ITS TAXABLE INCOME ON ACCOUNT OF EX-GRATIA PAID OF EARLIER YEAR S IN ACCORDANCE WITH THE PROVISION OF SECTION 43B OF THE ACT. R.W.S 36(1)(II ). DURING ASSESSMENT PROCEEDINGS THE ASSESSEE STATED THAT THE EX-GRATIA PAID BY THE ASSESSEE WAS IN THE NATURE OF BONUS EXPENSE. THE ASSESSEE STATED THAT THE AMOUNT PAYABLE TO THE EMPLOYEES OF THE COMPANY AS BONUS TO THE EXTENT COVERED AND P AYABLE AS PER THE PROVISION OF BONUS ACT HAD BEEN RECORDED UNDER THE EXPENSE HEAD BONUS AND THE AMOUNT OF BONUS EXCEEDING THE AMOUNT PRESCRIBED UNDER THE BONUS ACT HAD BEEN RECORDED AS EX-GRATIA. THUS THE ASSESSEE S UBMITTED THAT THE NATURE OF EX-GRATIA WAS BONUS PAYABLE TO THE EMPLOYEES OF THE COMPANY AND THEREFORE 25 THE ASSESSEE SUBMITTED THAT IT WAS COVERED UNDER TH E PROVISION OF SECTION 43B OF THE ACT, R.W.S 36(1)(II) AND DEDUCTION OF THE SAME WAS TO BE ALLOWED ON PAYMENT BASIS AS PRESCRIBED IN SAID SECTION. THE AS SESSEE FURTHER STATED THAT SECTION 36(1)(II) NOWHERE PRESCRIBED THAT ONLY BONU S AS PRESCRIBED UNDER THE BONUS ACT, IS COVERED UNDER THE SECTION. IT IS ANY AMOUNT PAYABLE TO EMPLOYEES BY THE ASSESSE AS BONUS WHICH IS COVERED UNDER THE AFORESAID PROVISIONS. THE ASSESSEE FURTHER PLACED RELIANCE ON THE DECISION IN THE CASE CIT VS. SHAW WALLACE & CO. LTD. 190 ITR 455 (CAL.) IN SUPPORT OF ITS CONTENTION THAT PAYMENT OF BONUS, BY WHATEVER NAME CALLED IN EXCESS OF BONUS P RESCRIBED UNDER THE BONUS ACT, WOULD BE ALLOWABLE AS PER THE PROVISION OF SEC TION 43B OF THE ACT. THE ASSESEE FURTHER SUBMITTED THAT DURING THE IMPUGNED ASSESSMENT YEAR THE ASSESSEE HAD CREATED A PROVISION FOR EX-GRATIA RS. 21,99,742/-AND SINCE THE SAME HAD NOT BEEN PAID BY THE DUE DATE OF FILING OF RET URN, THE SAID AMOUNT OF EX- GRATIA HAD BEEN ADDED BACK TO THE TAXABLE INCOME OF THE ASSESSE AS PER THE PROVISION OF SECTION 43B OF THE ACT. THE ASSESSEE S TATED THAT IF THE AMOUNT OF EX- GRATIA RELATING TO EARLIER YEARS WAS NOT ALLOWED ON THE GROUND THAT IT WAS NOT COVERED U/S 43B OF THE ACT, THEN ON THE SAME REASON ING, THE PROVISION FOR THE IMPUGNED YEAR AMOUNTING TO RS. 21,99,742/- SHOULD B E ALLOWED TO THE ASSESSEE. LD. A.O. REJECTED THE ASSESSEES CONTENTION AND PRO POSED ADDITION OF RS. 21,03,490/- ON ACCOUNT OF EX-GRATIA PAID DURING THE YEAR, FOLLOWING THE ORDER OF THE HONBLE DRP IN THE ASSESSEE OWN CASE FOR A.Y. 2 009-10. THE ASSESEEE DISPUTED THE PROPOSED ADDITION BEFORE THE HONBLE D RP WHO REJECTED THE ASSESSEES OBJECTION BY HOLDING AS FOLLOWS:- THE DRP CONSIDERED THE FACTS OF THE MATTER. THE BO NE OF CONTENTION WAS WHETHER THE PAYMENT OF EX-GRATIA WAS COVERED UNDER THE PROVISIONS OF SECTION 43B AND SECTION 36(L)(XI) OF THE ACT. THE DRP IS OF THE CONSIDERED VIEW THAT THE AMOUNTS PAID AS EX-GRATIA ARE NOT COVERED UNDER THE PROVISIONS OF SECTION 43B AND SECTION 36(1 )(II) OF THE ACT ACCORDINGLY THE O BJECTION OF THE APPLICANT IS NOT ALLOWED. AS REGARDS THE ALTERNATE SUBMISSION OF THE APPLICANT TO DIRECT THE AO TO ALLOW RELIEFOFRS.21,99,742/'-DISALLOWED SUO MOTO BY IT U/S 43B OF THE ACT DURING AY 2009-10, THE DRP IS OF THE. FIRM VIEW THAT THE SAID PRAYER OF THE APPLICANT CANNOT BE CONCEDED IN VIEW OF THE FACT THAT THE SUBJECT YE AR OF CONSIDERATION BEFORE THE DRP IS AY 2010-11 AND NOT 2009-10 HENCE BEYOND THE PALE OF CONSIDERATION OF THE DRP. 26 LD. A.O., FOLLOWING THE DRP DIRECTION MADE THE ADDI TION ON ACCOUNT OF DISALLOWANCE OF EX-GRATIA OF EARLIER YEAR AND ADDED THE SAME TO THE INCOME OF THE ASSESSEE TO THE EXTENT OF RS. 21,03,419/-. 37. AGGRIEVED BY THE SAME THE ASSESSEE FILED THE PR ESENT APPEAL BEFORE US. 38. BEFORE US LD. COUNSEL FOR THE ASSESSEE REPEATED THE CONTENTION AND ARGUMENTS MADE BEFORE LD. A.O. AND LD. DRP AND FURT HER STATED THAT AN IDENTICAL ISSUE HAD BEEN ADJUDICATED BY HONBLE ITA T IN THE ASSESSEES OWN CASE FOR A.Y. 2009-10 WHEREIN IT WAS HELD THAT EX-G RATIA COULD NOT BE CONSTRUED AS PART OF BONUS AND EX-GRATIA WAS TO BE ALLOWED ON ACCRUAL BASIS AS PART OF BUSINESS EXPENDITURE. LD. AR FURTHER POINTED OUT TH AT THE MATTER WAS REMITTED BACK TO THE FILE OF THE A.O. FOR RE-EXAMINATION OF THE COMPUTATION OF THE EX- GRATIA PAYMENT ON ACCRUAL BASIS. LD. DR ON THE OTH ER HAND SUPPORTED THE ORDER OF THE A.O. 39. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FIN D THAT THIS ISSUE HAD BEEN ADJUDICATED IN THE ASSESSES OWN CASE IN AY 2009-10 PARA43 OF THE ORDER OF THE TRIBUNAL IN ITA NO. 155/ CHD. / 2014 WHICH READS A S UNDER- AFTER CONSIDERING THE RIVAL SUBMISSIONS WE DO NOT AGREE WITH THE SUBMISSIONS THAT EX. GRATIA SHOULD BE CONSTRUED AS PART OF THE BONUS . WE HAVE CAREFULLY PERUSED THE JUDGEMENT OF HON'BLE CALCUTTA HIGH COURT AND IN THAT CASE THERE IS NO SUCH PRINCIPLE LAID DOWN. HOWEVER, THE HON'BLE COURT HAS CLEARLY HELD THAT EX-GRATIA PAYMENT MADE TO EMPLOYEES WHICH CONSISTS OF BONUS P AYMENT OVER AND ABOVE THE BONUS ACT SHOULD BE ALLOWED AS BUSINESS EXPENDI TURE. THEREFORE, IF SUM OF THE EX-GRATIA PAYMENT WAS PAYABLE FOR THAT YEAR, THE SA ME WAS REQUIRED TO BE ALLOWED ON ACCRUAL BASIS AS PART OF THE BUSINESS EX PENDITURE. SINCE THIS ASPECT HAS NOT BEEN EXAMINED BY THE ASSESSING OFFICER, THE REFORE, WE SET ASIDE HIS ORDER AND REMAND THE MATTER BACK TO HIS FILE FOR REEXAMIN ATION OF THE COMPUTATION OF THE EX-GRATIA PAYMENT AND IF SOME OF THE EX-GRATIA PAYMENT PERTAINS TO THE ASSESSMENT BEFORE US I.E. ASSESSMENT YEAR 2009-10, THEN THE SAME SHOULD BE ALLOWED ON ACCRUAL BASIS AS BUSINESS EXPENDITURE OT HERWISE THE ISSUE MAY BE DECIDED IN ACCORDANCE WITH LAW. FOLLOWING THE SAME, WE HOLD THAT EX-GRATIA PAYMENT PERTAINING TO THE IMPUGNED YEAR ONLY IS ALLOWABLE AS BUSINESS EXPENDI TURE AND SINCE THIS ASPECT HAS NOT BEEN EXAMINED BY THE AO, WE SET ASIDE THE O RDER AND REMAND THE 27 MATTER BACK TO THE FILE OF THE A.O. FOR RE-EXAMINAT ION IN TERMS OF THE DIRECTION CONTAINED IN PARA43 OF THE ORDER OF TRIBUNAL FOR A .Y. 2009-10. 40. THIS GROUND OF APPEAL OF THE ASSESSEE IS THEREF ORE ALLOWED FOR STATISTICAL PURPOSE. GROUND NO. 10: 41. THIS GROUND RAISED BY THE ASSESSEE IS AGAINST T HE DISALLOWANCE OF ROYALTY EXPENSES OF RS. 2,53,72,500/- INCURRED BY THE ASSES SEE FOR THE MANUFACTURE OF ITS PRODUCT PURIMOX. 42. BRIEF FACTS RELATING TO THE ISSUE ARE THAT DURI NG THE IMPUGNED A.Y. THE ASSESSEE HAD CLAIMED EXPENSES AMOUNTING TO RS. 33.8 3 MILLION ON ACCOUNT OF PAYMENT OF ROYALTY DURING THE YEAR. WHEN CONFRONTED WITH THE SAME THE ASSESSEE STATED THAT THE IMPUGNED ROYALTY HAD BEEN PAID IN PURSUANCE TO A LICENSE AGREEMENT ENTERED INTO WITH DSM ANTI INFECT IVES B.V. FOR THE USE OF PATENTS AND TECHNOLOGY FOR THE PRODUCTION OF A PROD UCT NAMELY PURIMOX. THE ASSESSEE STATED THAT AS PER THE AGREEMENT A NON-DIV ISIBLE, NON-EXCLUSIVE, NON- TRANSFERABLE AND NON-SUB LICENSABLE LICENSE HAD BEE N GRANTED TO THE ASSESSEE FOR THE USE OF PATENT AND TECHNOLOGY FOR THE MANUFA CTURING OF PURIMOX. AS PER THE TERMS OF THE AGREEMENT, PAYMENT OF ROYALTY WAS SUBJECT TO THE ASSESSEE COMPANY ACHIEVING A MINIMUM OUTPUT OF 1000 METRIC T ONNE WHICH IF NOT ACHIEVED THE AMOUNT OF ROYALTY WOULD BE RE-NEGOTIAT ED. THE ASSESSEE FURTHER STATED THAT THE OWNERSHIP OF THE PATENT AND TECHNOL OGY FOR THE MANUFACTURING OF PURIMOX REMAINED WITH DSM ANTI-INFECTIVES B.V. T HE ASSESSEE STATED THAT BY VIRTUE OF THE LICENSE AGREEMENT THE ASSESSEE WAS EN TITLED TO USE TECHNOLOGY FOR THE MANUFACTURING AND SALE OF PURIMOX PRODUCT AND W AS ALSO ENTITLED TO UPDATES / IMPROVEMENTS IN THE SAME. THE ASSESSEE WA S ALSO ENTITLED TO SUPPORT RECEIVED TOWARDS IMPLEMENTATION OF THE TECHNOLOGY I N THE PURIMOX PLANT, TRAINING OF EMPLOYEES OF THE ASSESSEE COMPANY AND T ROUBLE-SHOOTING ACTIVITIES. 28 THE ASSESSEE STATED THE ROYALTY EXPENSES WERE INCUR RED BY THE ASSESSEE FOR THE PURPOSE OF ITS BUSINESS AND WAS ALLOWABLE AS PER TH E PROVISIONS OF SECTION 37(1) OF THE ACT. THE ASSESSEE ALSO STATED THAT THE PAYME NT OF ROYALTY WAS UNDERTAKEN IN ACCORDANCE WITH THE REGULATIONS AND H AD MET THE ARMS LENGTH PRINCIPLE. THE ASSESSEE ALSO STATED THAT BY VIRTUE OF THIS EXPENDITURE NO CAPITAL ASSET OR BENEFIT OF ENDURING NATURE HAD BEEN ACQUIR ED BY THE ASSESSEE AND THUS THE EXPENDITURE COULD NOT BE TREATED TO BE CAPITAL IN NATURE. THE ASSESSEE FURTHER PLACED RELIANCE ON A NUMBER OF DECISIONS IN SUPPORT OF ITS CONTENTION THAT THE IMPUGNED EXPENDITURE HAD NOT RESULTED IN ANY EN DURING BENEFIT TO THE ASSESSEE AND THUS COULD NOT BE TREATED AS CAPITAL I N NATURE. THE ASSESSEE FURTHER STATED THAT THE ROYALTY AGREEMENT WAS NOT A SALE AG REEMENT FOR THE SALE OF TECHNICAL KNOW-HOW TO THE ASSESSEE. THE ASSESSEE HA D ONLY OBTAINED A RIGHT TO USE TECHNOLOGY BY VIRTUE OF THIS AGREEMENT, SIN CE THE OWNERSHIP RIGHT AND CONTROL OVER THE TECHNOLOGY WERE NOT TRANSFERRED TO THE ASSESSEE. THE ASSESSEE PLEADED THAT THE EXPENDITURE COULD NOT BE SAID TO B E CAPITAL IN NATURE. THE ASSESSEE PLACED RELIANCE UPON A NUMBER OF JUDICIAL DECISIONS IN SUPPORT OF THE ABOVE CONTENTIONS. 43. LD. AO REJECTED THE CONTENTIONS OF THE ASSESSEE AND PROPOSED DISALLOWANCE OF EXPENDITURE ON ROYALTY TREATING THE SAME AS BEING CAPITAL IN NATURE FOR THE REASON THAT BY VIRTUE OF THIS EXPEND ITURE THE ASSESSEE WAS ENTITLED TO ENJOY FULL RIGHTS FOR USING THE PATENTS AND ADVA NCED TECHNOLOGY FOR THE PRODUCTION OF ITS PRODUCT GIVING ENDURING BENEFITS TO THE ASSESSEE AND FOR THE REASON THAT THE PAYMENT WAS LUMPSUM IN NATURE. THER EAFTER THE ASSESSSEE FILED OBJECTION TO THE DRP AGAINST THE PROPOSED DISALLOWA NCE WHO UPHELD THE DISALLOWANCE MADE AND GAVE A FURTHER DIRECTION TO A LLOW DEPRECIATION ON THE SAME AS FOLLOWS:- THE DRP CONSIDERED THE FACTS OF THE MATTER. IT IS AN UNDISPUTED FACT THAT THE LICENCE OBTAINED BY THE APPLICANT CONFERRED AN EXC LUSIVE RIGHT ON THE APPLICANT TO MANUFACTURE THE PRODUCT PURIMOX(R). IN A SENSE I T ENJOYED A MONOPOLY IN 29 RESPECT OF THE PRODUCT MANUFACTURED BY IT WITH THE HELP OF THE TECHNOLOGY OF THE M/S DIA BV. THE PATENT ALONGWITH ANY IMPROVEMENTS M ADE TO IT AND THE TECHNOLOGY EMPLOYED TO PRODUCE THE ABOVE SAID PRODU CT WAS TO REMAIN THE EXCLUSIVE PROPERTY OF DIA BV IN LIEU OF WHICH THE A PPLICANT COMPANY WAS MADE TO PAY ROYALTY. THE CASE LAWS CITED BY THE APPLICAN T WERE ALSO NOT APPLICABLE TO THE FACTS AT HAND. THE ADVANTAGE ACCRUING TO THE AP PLICANT DID NOT ACT AS A MERE FACILITATOR OF THE APPLICANT'S TRADING OPERATI ONS OR ENABLED IT TO MANAGE AND CONDUCT ITS BUSINESS TO BE CARRIED ON MORE EFFI CIENTLY OR MORE PROFITABLY. RATHER THE LICENCE BROUGHT INTO EXISTENCE A REVENUE GENERATING ASSET OF ENDURING ADVANTAGE TO THE APPLICANT. THEREFORE THE ROYALTY P AYMENT OF RS.3,83,30,000/- BEING AN EXPENDITURE UNDERTAKEN FOR THE BENEFIT OF THE BUSINESS AS A WHOLE - AN EXPENSE INCURRED FOR THE ACQUISITION OF A SOURCE OF PROFIT OR INCOME AND NOT FOR MAKING THE PROFIT MAKING STRUCTURE WORK MORE EFFICI ENTLY. THE DRP DOES NOT SEE ANY ELEMENT OF EFFECTIVENESS, EFFICIENCY AND PROFIT ABILITY BEING WON BY THE APPLICANT ON ACCOUNT OF SUCH ROYALTY PAYMENT. HOWEV ER, THE AO IS DIRECTED TO ALLOW DEPRECIATION ATTRIBUTABLE TO LICENCES AS PER SECTION 32 OF THE ACT THE OBJECTION S DISPOSED OFF ACCORDINGLY. FOLLOWING THE SAME LD. AO DISALLOWED ROYALTY AMOUNT ING TO RS. 3,38,30,000/- AND ADDED THE SAME TO THE INCOME OF THE ASSESSEE AF TER ALLOWING DEPRECIATION OF RS. 84,57,500/- BEING 25% OF RS. 3,38,30,000/- O N THE SAME. 44. AGGRIEVED BY THE SAME THE ASSESSEE FILED THE PR ESENT APPEAL BEFORE US. 45. BEFORE US LD. COUNSEL FOR THE ASSESSEE REITERAT ED THE SUBMISSIONS MADE BEFORE AO/DRP AND FURTHER SUBMITTED THAT THIS ISSUE HAD BEEN DECIDED BY THE TRIBUNAL IN A.Y. 2009-10 AND THE PAYMENT OF ROYALTY WAS HELD TO BE ALLOWABLE EXPENDITURE. 46. AFTER CONSIDERING THE SUBMISSIONS, WE FIND THAT THIS ISSUE HAS BEEN ADJUDICATED IN THE ASSESSES CASE IN AY 2009-10 AT P ARA 56 TO 59 OF THE ORDER OF THE TRIBUNAL IN ITA NO. 155/ CHD. / 2014 DATED 16.0 3.2015 WHEREIN IT WAS HELD AS UNDER: 56. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CARE FULLY. WE FIND FORCE IN THE SUBMISSIONS OF LD. COUNSEL FOR THE ASSESSEE. THE LI CENSE AGREEMENT BETWEEN THE DAI BV AND THE ASSESSEE HAS BEEN ENTERED ON 10.03.2 006. CLAUSE (2) OF THIS AGREEMENT READS AS UNDER:- '2. LICENCE 2.1 FOR THE DURATION OF THIS AGREEMENT AND SUBJECT TO THE TERMS AND CONDITIONS CONTAINED HEREIN, DAJBV HERBY GRANTS DAI-INDIA HERE BY ACCEPTS FROM DAIBV, A NON-DIVIDABLE, NON EXCLUSIVE, NON TRANSFERABLE AND NON-SUBLICENSABLE THE PATENTS AND THE TECHNOLOGY SOLELY TO USE THE PATENTS AND TH E TECHNOLOGY AT THE PURIMOX PLANT FOR THE MANUFACTURE OF THE PRODUCT AND FOR TH E SUBSEQUENT SALE OF THE PRODUCT WITHIN THE TERRITORY. 30 ANY OTHER USE OF THE TECHNOLOGY BY DAI-INDIA SHALL BE DEEMED A MATERIAL BREACH OF DA I-INDIA HEREUNDER AND SHALL ENTITLE DA IBV TO TERMINATE THE AGREEMENT PURSUANT TO ARTICLE 8.3 BELOW, IN ADDITIO N TO ANY OTHER REMEDIES AVAILABLE TO IT BY LAW. FURTHER SOME OTHER IMPORTANT CLAUSES ARE AS UNDER:- '4. THE TITLE TO THE PATENTS AND THE TECHNOLOGY SHA LL REMAIN WITH DAIBV, TITLE TO ANY AND ALL IMPROVEMENTS OF THE PATENTS AND TECHNOLOGY SHALL VEST EXCLUSIVELY IN DAIBV. 5.1 DAI-INDIA SHALL PAY A LUMP SUM ROYALTY FOR THE LICENSE GRANTED HEREUNDER ROYALTY PAYABLE IN INSTALLMENTS AS FOLLOW S:- 2006 : US$ 0 2007 : US$ 1.0 MIO (ONE MILLION) 2008 : US$ 1.0 MIO (ONE MILLION) 2009 : US$ 1.0 MIO (ONE MILLION) 57. THE PERUSAL OF THE LICENSE AGREEMENT AND PARTIC ULARLY THE ABOVE CLAUSES CLEARLY SHOWS THAT ASSESSEE HAS OBTAINED THE RIGHT TO USE THE PATENT FOR PRODUCTION OF PURIMOX AND THIS RIGHT IS NOT EXCLUS IVE AND CANNOT BE USED FOR OTHER PURPOSES OTHER THAN THE PRODUCTION OF THE PAR TICULAR PRODUCT. FURTHER, THE OWNERSHIP OF THE PATENT REMAINS WITH THE OWNER. ALS O FOR USAGE OF THIS PATENT, A LUMPSUM PAYMENT IN THE FORM OF ROYALTY HAS BEEN AGR EED FOR IN TERMS OF CLAUSE 5.1. THEREFORE, IT IS CLEARLY A PAYMENT OF ROYALTY FOR USE OF THE PATENT. IN OUR OPINION, THIS IS CLEARLY A CASE OF REVENUE EXPENDIT URE. 58. IN THE SIMILAR CASE WHICH CAME UP FOR THE CONSI DERATION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. I.A.E.C(PUMPS) LTD. (SUPRA) WHEREIN UNDER AN AGREEMENT THE ASSESSEE WAS GRANTED A LICENSE TO USE ITS PATENTS AND DESIGNS EXCLUSIVELY IN INIDIA. THE AGREEMENT WAS FOR A DURA TION OF 10 YEARS WITH THE PARTIES HAVING THE OPTION TO EXTEND OR RENEW THE AGREEMENT. THE FOREIGN COMPANY UNDERTOOK NOT TO SURRENDER ITS PATENTS WITHOUT THE CONSENT OF THE ASSESSEE AND TO MAKE AVAILABLE TO THE ASSESSEE ANY IMPROVEMENTS, MO DIFICATIONS AND ADDITIONS TO DESIGNS. IT HAD ALSO UNDERTAKEN TO ENABLE THE AS SESSEE TO DEFEND ANY COUNTERFEIT BY OTHERS. THE ASSSSEE WAS NOT TO DISCL OSE TO THIRD PARTIES ANY OF THE DOCUMENTS MADE AVAILABLE BY THE FOREIGN COMPANY TO THE ASSESSEE WITHOUT HAVING RECEIVED A WRITTEN AUTHORIZATION FROM THE FO REIGN COMPANY. THE HIGH COURT HELD THAT THESE FEATURES OF HE AGREEMENT CLEA RLY ESTABLISHED THAT WHAT WAS OBTAINED BY THE ASSESSEE WAS ONLY A LICENSE AND WHA T WAS PAID BY THE ASSESSEE TO THE FOREIGN COMPANY WAS ONLY A LICENCE FEE AND N OT THE PRICE FOR ACQUISITION OF ANY CAPITAL ASSET. ON APPEAL BY THE DEPARTMENT T O THE SUPREME COURT IT WAS HELD AS UNDER: HELD, AFFIRMING THE DECISION OF THE HIGH COURT, T HAT THE HIGH COURT HAD APPLIED THE PROPER PRINCIPLES OF LAW AND HAD RIGHTLY HELD T HAT THE EXPENDITURE INCURRED BY THE ASSESSEE WAS ONLY REVENUE EXPENDITURE. IN OUR OPINION THE CASE OF THE ASSESSEE IS IDENTICA L TO THE ABOVE NOTED CASE OF THE SUPREME COURT AND THE PRINCIPLE LAID DOWN BY HO N'BLE SUPREME COURT IS CLEARLY APPLICABLE. THEREFORE, WE SET ASIDE THE ORD ER THE ASSESSING OFFICER AND HOLD THAT EXPENDITURE INCURRED FOR PAYMENT OF ROYAL TY IS ALLOWABLE AND THEREFORE, DELETE THE ADDITION. FOLLOWING THE ABOVE ORDER WE HOLD THAT THE EXPENDIT URE INCURRED BY THE ASSESSEE FOR THE PAYMENT OF ROYALTY OF RS. 3,38,30, 000/- IS ALLOWABLE AND WE 31 FURTHER HOLD THAT THE DEPRECIATION ALLOWED THEREON BE WITHDRAWN. WE THEREFORE, SET ASIDE THE ORDER OF THE AO AND DELETE THE ADDITI ON MADE. 47. THIS GROUND OF APPEAL OF THE ASSESSEE IS THEREF ORE ALLOWED IN ABOVE TERMS. GROUND NO. 11: 48. THIS GROUND RAISED BY THE ASSESSEE IS AGAINST T HE DISALLOWANCE OF EXPENDITURE OF RS. 41,84,904/- ON THE GROUND THAT T HE ASSESSEE HAD FAILED TO PRODUCE RELEVANT BILLS AND VOUCHERS DURING THE COUR SE OF ASSESSMENT PROCEEDINGS. 49. BRIEF FACTS RELATING TO THE CASE ARE THAT DURIN G ASSESSMENT PROCEEDINGS THE ASSESSEE WAS ASKED TO PRODUCE ALL BILLS/ VOUCHERS I N SUPPORT OF THE EXPENSES CLAIMED UNDER HEAD MISCELLANEOUS EXPENDITURE. LD. A O ON SCRUTINY OF THE SAME FOUND THAT CERTAIN EXPENSES WERE NOT DULY SUPPORTED WITH BILLS WHILE SOME OF THE BILLS PERTAINED TO EARLIER YEARS. HE THEREFORE, PRO POSED DISALLOWANCE OF A SUM OF RS. 41,84,904/-. THE ASSESSEE CONTESTED THE PROPOSE D DISALLOWANCE BEFORE THE HONBLE DRP WHO AFTER CONSIDERING THE ASSESSEE SUBM ISSIONS UPHELD THE DISALLOWANCE MADE BY HOLDING AS FOLLOWS AT PARA 12 OF ITS ORDER: DECISION OF THE DRP:- DURING THE HEARING BEFORE DR P THE APPLICANT SUBMITTED THAT THE AO AT THE STAGE OF THE ASSESSMENT PROCEEDI NGS CALLED UPON IT TO PRODUCE THE DETAILS OF EXPENSES UNDER THE HEAD MISC ELLANEOUS EXPENSES WHICH AS DONE AMOUNTING TO RS. 1,78,00,000/-. HOWEVER, UP ON SCRUTINY THE AO DISCOVERED THAT SUPPORTING BILLS/ VOUCHERS/EXPLANAT IONS WERE NOT THERE. NOW AT THIS STAGE OF DRP PROCEEDINGS THE AO SEEKS TO TENDE R FRESH EVIDENCE IN RELATION TO SUCH ITEMS AS DEPICTED BELOW:- THE SUBMISSION OF THE APPLICATION IN RELATION TO TH E ABOVE WAS DULY CONSIDERED. THE DRP IS OF THE VIEW THAT THE REQUEST, OF THE APP LICANT TO ADMIT FRESH EVIDENCE AT THIS STAGE MERITS NO CONSIDERATION FOR THE REASO N THAT THE APPLICANT COULD NOT ESTABLISH ITS CASE BEFORE THE UNDERSIGNED THAT THER E WAS PAUCITY OF TIME WHICH PREVENTED IT FROM FURNISHING THE EVIDENCE IN RESPEC T OF THE ABOVE ITEMS OF EXPENDITURE BEFORE THE AO AT THE STAGE OF ASSESSMEN T PROCEEDINGS. THEREFORE, THE OBJECTION OF THE APPLICANT IS REJECTED AND THE ADDITION MADE BY THE AO IS SUSTAINED. 50. AGGRIEVED BY THE SAME THE ASSESSEE FILED THE PR ESENT APPEAL BEFORE US. 32 51. BEFORE US LD. COUNSEL FOR THE ASSESSEE SUBMITTE D THAT THIS ISSUE WAS TAKEN UP DURING THE CLOSING STAGES OF THE ASSESSMENT PROC EEDINGS AND THUS, DUE TO PAUCITY OF TIME THE ASSESSEE WAS UNABLE TO PRODUCE THE RELEVANT BILLS / SUPPORTING VOUCHERS. THE LD. COUNSEL FURTHER SUBMIT TED THAT ALL THE DOCUMENTS AND BILLS HAD BEEN DULY SUBMITTED BEFORE THE LD. DR P AS ADDITIONAL EVIDENCE BUT THE SAME WERE NOT CONSIDERED. LD. AR FURTHER SU BMITTED THAT AS FAR AS THE ISSUE OF PRIOR PERIOD EXPENSES WAS CONCERNED THE SA ME WERE ALLOWABLE IN THE VIEW OF THE FACT THAT THE EXPENDITURE HAD CRYSTALLI ZED DURING THE YEAR ITSELF. LD. AR SUBMITTED THAT THE ASSESSEE COMPANY MAINTAINS A SAP SYSTEM AND FOLLOWS THE MATCHING PRINCIPLE OF ACCOUNTING AS PER WHICH A LL EXPENDITURE PERTAINING TO THE YEAR, THE BILLS FOR WHICH ARE RECEIVED EVEN AFT ER THE YEAR END, ARE PROVIDED IN THE BOOKS AS PROVISION. AS PER THE SAP SYSTEM, T HE PROVISION CREATED IS REVERSED IN THE NEXT YEAR AUTOMATICALLY AND THE BIL LS RECEIVED ON ACCOUNT OF THE SAME ARE PROVIDED FOR IN THE BOOKS, RESULTING IN NI L EFFECT. LD. AR PLEADED THAT THE EXPENSES PERTAINING TO MISCELLANEOUS EXPENDITUR E INCURRED IN EARLIER YEARS HAD IN FACT BEEN NULLIFIED BY THE PROVISION REVERSE D IN THIS YEAR. THUS, THE LD. AR STATED THAT IN FACT NO PRIOR PERIOD EXPENSES HAD BE EN INCURRED BY THE ASSESSEE IN THE IMPUGNED A.Y. AND THUS THERE WAS NO REASON T O MAKE DISALLOWANCE ON ACCOUNT OF THE SAME. LD. COUNSEL FOR THE ASSESSEE A LSO STATED THAT BOTH THE SOFT COPY AND HARD COPY OF THE BOOKS OF ACCOUNTS HAD BEE N SUBMITTED TO THE AO BY THE ASSESSEE DURING ASSESSMENT PROCEEDINGS ALONG WITH COPY OF THE LEDGER ACCOUNT OF MISCELLANEOUS EXPENSES. ON THE OTHER HAN D, LD. DR STRONGLY SUPPORTED THE ASSESSMENT ORDER. 52. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE PE RUSED THE DOCUMENTS PLACED BEFORE US. 33 THE ISSUE BEFORE US IN DISALLOWANCE OF MISCELLANEOU S EXPENSE AMOUNTING TO RS. 41,84,904/- FOR WANT OF SUPPORTING VOUCHERS AND FOR THE REASON THAT SOME EXPENSES PERTAINED TO EARLIER YEARS. THE DETAIL OF THE MISCELLANEOUS EXPENSE DISALLOWED TO REPRODUCED AT PAGE NO. 89-91 OF THE ASSESSMENT ORDER IS AS FOLLOWS: G/L ACCOUNT DOCUMENT NUMBER DOCUMENT DATE POSTING DATE TEXT (AS COPIED FROM THE REPLY SUBMITTED BY ASSESSEE) AMOUNT IN LOCAL CURRENCY REMARKS 6429100 5100015156 3/31/2009 4/8/2009 BLANK 258071. 00 OLD 6429100 5100015780 3/15/2009 4/23/2009 -DO- 16097.0 0 OLD 6429100 5100015805 3/15/2009 4/24/2009 -DO- 123070. 00 OLD 6429100 5100017926 2/12/2009 5/26/2009 -DO- 4500.00 OLD 6406120 5100014922 3/22/2009 4/2/2009 -DO- 1112.00 OLD 6406120 5100014923 3/22/2009 4/2/2009 ANNUAL FEE-AM EX- VIKRAM 1112.00 OLD 6406120 5100014925 3/22/2009 4/2/2009 ANNUAL FEE-AM EX- BINOD 1112.00 OLD 6409100 5100014952 3/30/2009 4/2/2009 STATIONARY IT EMS- GGN OFF 46337.27 OLD 6426100 5100015020 3/31/2009 4/6/2009 ELECT-GGN GH- MARCH09 1890.00 OLD 6426100 5100015154 3/31/2009 4/8/2009 ELECT-GGN GH- MARCH09-DSM INDIA 659.00 OLD 6426100 5100015167 3/24/2009 4/8/2009 SECURITY-ELEC T-BBY OFF 3330.00 OLD 6426100 5100015168 3/24/2009 4/8/2009 SECURITY- ELECTRICITY-BBY OFF 11740.00 OLD 6429100 5100015553 3/30/2009 4/16/2009 BLANK 50000. 00 OLD 6429100 5100015801 3/7/2009 4/24/2009 -DO- 130080.0 0 OLD 6429100 5100015803 3/31/2009 4/24/2009 -DO- 31330.0 0 OLD 6406120 5100015883 3/9/2009 4/27/2009 PHARMEXCIL- RCMC TOANSA 2009-10 MEMBERSHIP FEES 21000.00 OLD 34 6406120 5100015885 3/9/2009 4/27/2009 PHARMEXCIL- RCMC TOANSA 2009-10 MEMBERSHIP FEES 6500.00 OLD 6406120 5100016137 3/2/2009 4/29/2009 ANNUAL SUBSCRIPTION- LEGAL 35358.00 OLD 6429100 5100016791 3/24/2009 4/30/2009 DISPOSAL CHA RGES TO NIMBUA 90526.00 OLD 6406120 5100022677 3/19/2009 8/24/2009 NSC-MEMBERSH IP FEES APR09 TO MAR10-NARANG 1200.00 OLD 6406120 5100023266 3/3/2009 9/3/2009 REGISTRATION F EE FOR HYD SUMMMIT IN SEP 09- JAIRAJ 7000.00 OLD 6406120 5100023266 3/3/2009 9/3/2009 REGISTRATION F EE FOR HYD SUMMIT IN SEP 09- BHUPIND 7000.00 OLD 6406120 5100023266 3/3/2009 9/3/2009 REGISTRATION F EE FOR HYD SUMMIT IN SEP 09- GIRISH 7000.00 OLD 6406120 5100034163 3/23/2009 2/1/2010 SUBSCRIPTION APRIL TO MARCH 2010 ARUN MEHRA ICC IN 50000.00 OLD 6429100 6429100 TOTAL 5100025745 5100025744 10.12.2009 10.13.2009 10.12.2009 10.13.2009 LABOUR CHARGES FOR CAPPING JOBS 1010880.00 2268000.00 4184904.27 NO VOUCHER NO VOUCHER A SCRUTINY OF THE ABOVE REVEALS THAT OUT OF THE SAM E EXPENSES OF RS. 9,06,024 RELATE TO THE MONTH OF MARCH 2009. COPY OF THE INVO ICES RELATING TO THESE EXPENSES WERE PRODUCED BEFORE US AT PAGE NO. 519-56 4 OF THE PAPER BOOK A PERUSAL OF WHICH AFFIRMS THE FACT THAT THE IMPUGNED EXPENSE RELATE TO THE MONTH OF MARCH 2009, I.E; PRIOR PERIOD. 53. WE FIND THAT THE CLAIM OF THE ASSESSEE THAT IT HAS NOT CLAIMED ANY DEDUCTION IN RESPECT OF IMPUGNED PRIOR PERIOD EXPEN SES, HAS NOT BEEN EXAMINED BY AO OR BY DRP, DESPITE THE FACT THAT SPE CIFIC ARGUMENT WAS RAISED TO THIS EFFECT AND BOOKS OF ACCOUNTS PRODUCED BEFOR E THE AO. THEREFORE, THE AO IS DIRECTED TO VERIFY THIS FACT AND IF IT IS FOU ND THAT SUCH AMOUNT HAS NOT BEEN CLAIMED AS DEDUCTION DURING THE YEAR NO DISALLOWANC E CAN BE MADE IN RESPECT OF SUCH NON-CLAIMED DEDUCTION. IN CASE ANY SUCH AMO UNT IS CLAIMED AS DEDUCTION, PLEA OF THE ASSESSEE THAT LIABILITY IN R ESPECT OF SUCH EXPENSES HAS 35 CAPITALIZED IN THE YEAR UNDER APPEAL SHOULD ALSO BE EXAMINED AS ASSESSING OFFICER HAS NOT DEALT WITH THIS ARGUMENT OF THE ASS ESSEE THOUGH SPECIFICALLY RAISED. AO SHALL GIVE OPPORTUNITY OF HEARING TO THE ASSESSEE AND DECIDE THE ALLOWABILITY OF DEDUCTION IN ACCORDANCE WITH LAW AN D IN THE LIGHT OF ABOVE MENTIONED DIRECTION. AS REGARDS THE OTHER COMPONENT OF DISALLOWANCE OF R S. 32,78,880/- ON ACCOUNT OF NON-PRODUCTION OF SUPPORTING DOCUMENTS, IT IS SE EN THAT AO DID NOT GIVE ADEQUATE OPPORTUNITY TO THE ASSESSEE AND WHEN EVIDE NCES WERE FILED BEFORE DRP, DRP WITHOUT ASSIGNING ANY REASON, BRUSHED ASID E THE SAME WHICH IN OUR CONSIDERED OPINION IS NOT JUSTIFIED. THEREFORE THIS ISSUE IS SENT BACK TO THE FILE OF AO TO DECIDE IT AFTER GIVING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 54. THIS GROUND OF APPEAL OF THE ASSESSEE IS THEREF ORE ALLOWED IN ABOVE TERMS. GROUND NO. 12: 55. THIS GROUND RAISED BY THE ASSESSEE IS AGAINST T HE DISALLOWANCE OF EXPENDITURE OF RS. 1,21,20,940/- FOR THE REASON THA T THE ASSESSEE FAILED TO FILE SATISFACTORY REPLY AND THE SAID BILLS PERTAINED TO EITHER EARLIER YEAR OR WERE UNSUPPORTED WITH VOUCHERS. 56. BRIEF FACTS RELATING TO THE ISSUE ARE THAT DURI NG ASSESSMENT PROCEEDINGS IT WAS FOUND THAT CERTAIN EXPENSES INCURRED BY THE ASS ESSEE WERE EITHER NOT DULY SUPPORTED BY VOUCHERS OR PERTAINED TO EARLIER YEARS AS PER THE DETAILS PROVIDED IN THE ASSESSMENT ORDER. THE ISSUE WAS CONFRONTED T O THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS AND THE LD. AO, NOT SATISFIE D WITH THE EXPLANATION OF THE ASSESSEE, PROPOSED A DISALLOWANCE OF RS. 1,21,2 0,940/- OF THE FOLLOWING EXPENSES. 36 EXPENSES AMOUNT (RS.) BUSINESS ENTERTAINMENT EXPENSES 73,75,064 TRAVELLING & CONVEYANCE EXPENSES 14, 31, 671 COMMUNICATION EXPENSES 5, 50,061 PRINTING & STATIONERY EXPENSES 49, 22 8 WORKMEN & STAFF WELFARE EXPENSES 27, 14,916 _____________ TOTAL 1,21,20,940 ============ THE ASSESSEE DISPUTED THE PROPOSED ADDITION BEFORE THE DRP WHO UPHELD THE SAME BY HOLDING AS FOLLOWS: DECISION OF THE DRP: - DURING THE HEARING BEFORE DRP IT WAS SUBMITTED BY THE APPLICANT THAT THE AO WHILE SCRUTINIZING THE BOOKS OF ACCOUNT OF THE APPLICANT AT THE DRAFT ASSESSMENT STAGE CALLED UPON IT TO FURNIS H BILLS PERTAINING TO PREVIOUS YEARS. BESIDES SUPPORTING VOUCHERS WERE ALSO REQUIR ED TO BE FURNISHED. THE APPLICANT DUE TO PAUCITY OF TIME COULD NOT SUBMIT T HE RELATED BILLS AND VOUCHERS OF VARIOUS EXPENSES. HOWEVER, THE LEDGER ACCOUNTS O F ALL SUCH EXPENSES WERE FURNISHED TO HIM VIDE SUBMISSIONS DATED 9/1/2014, 1 4/03/2014 AND 21/03/2014. SINCE THE APPLICANT FAILED TO SUBSTANTIATE ITS CLAI M WITH REGARD TO THE PRIOR PERIOD EXPENSES AND UN-VOUCHED EXPENSES, THE AO WAS WELL W ITHIN HIS RIGHTS IN DISALLOWING THE SAID EXPENDITURE. ACCORDINGLY THE O BJECTION OF THE APPLICANT IS REJECTED. IN VIEW OF THE ABOVE, THE ASSESSING OFFICER DISALLO WED THE EXPENDITURE. 57. AGGRIEVED BY THE SAME THE ASSESSEE FILED THE PR ESENT APPEAL BEFORE US. 58. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE AUTHORITIES BELOW AS ALSO THE DOCUMENTS PLACED BEFO RE US. 59. THE ISSUE BEFORE US IS REGARDING DISALLOWANCE O F FOLLOWING EXPENSES FOR THE REASON THAT THEY ARE NOT DULY SUPPORTED AND PERTAIN TO EARLIER YEAR AS FOLLOWS:- S. NO PARTICULARS AMOUNT DISALLOWED REASON FOR DISALLOWANCE 1. A. BUSINESS ENTERTAINMENT COST CUSTOMERS B. BUSINESS ENTERTAINMENT COST C. CONFERENCE / SEMINARS D. BROCHURES / LEAFLETS 73,75,064.67 A. PERTAINS TO PREVIOUS YEAR B. NO BILLS / VOUCHERS C. NO PROPER BILLS / VOUCHERS SHOWS THE COMBINED BILL FROM WHERE THESE FIGURES CANNOT BE TALLIED. 2. TRAVELLING EXPENSES 14,31,671.78 PREVIOUS YEAR BILLS 3. COMMUNICATION EXPENSES 5,50,061.75 PREVIOUS YEAR BILLS 37 4. PRINTING & STATIONERY 49,228.79 PREVIOUS YEAR BILLS 5. WORKMEN & STAFF WELFARE 27,14,916.00 NO BILLS / VOUCHERS WE FIND THAT THE DISALLOWANCE HAS BEEN MADE FOR SEV ERAL REASONS AND WE SHALL NOW PROCEED TO DEAL WITH EACH ONE OF THEM. 60. CERTAIN EXPENSES HAVE BEEN DISALLOWED FOR THE R EASON THAT THEY PERTAIN TO PRECEDING YEARS. BEFORE US LD. AR FORWARDED TWO FOLD ARGUMENTS FOR T HE SAME LD. AR STATED THAT CERTAIN EXPENSES RELATING TO EARLIER YEARS, BUT BIL LS OF WHICH WERE RECEIVED IN THE IMPUGNED YEAR, WERE ACCOUNTED FOR IN THE EARLIER YE AR BY WAY OF CREATING A PROVISION FOR THE SAME, WHICH ON RECEIPT OF THE BIL L IN THE CURRENT YEAR WAS ACCOUNTED FOR BY REVERSING THE PROVISION. LD. AR ST ATED THAT SUCH PRIOR PERIOD EXPENSES WERE NOT CLAIMED BY THE ASSESSEE IN THE IM PUGNED YEAR AT ALL. FURTHER LD. AR STATED THAT WITH RESPECT TO CERTAIN OTHER EX PENSES RELATING TO EARLIER YEARS, THE SAME WERE INCURRED BY EMPLOYEES ON DUTY TOWARDS TRAVELING WHILE ON OFFICIAL TRIP AND SINCE BILLS RELATING TO THE SAME WERE SUBMITTED IN THE IMPUGNED YEAR, THE LIABILITY CRYSTALLIZED IN THE CURRENT YEA R AND WAS RIGHTLY ACCOUNTED FOR IN THE IMPUGNED ASSESSMENT YEAR. LD. AR RELYING UPON THE DECISION OF THE GUJARAT HIGH COURT IN THE CASE OF SAURASHTRA CEMENT AND CHE MICALS INDUSTRIES LTD. VS CIT 213 ITR 523 STATED THAT THE IMPUGNED EXPENSES COULD NOT BE TERMED AS PRIOR PERIOD EXPENSES, SINCE LIABILITY OF THESE EXPENSES HAD CRYSTALLIZED DURING THE IMPUGNED ASSESSMENT YEAR ITSELF WHEN THE BILLS WERE SUBMITTED TO THE ASSESSEE. LD. AR STATED THAT THESE ARGUMENTS WERE MADE BEFORE THE LD. A.O. DURING ASSESSMENT PROCEEDINGS AND DREW OUR ATTENTION TO PA PER BOOK PAGE NO. 1094- 1097 BEING LETTER SUBMITTED DURING ASSESSMENT PROCE EDINGS DATED 23.03.2014 MAKING THE ABOVE SUBMISSIONS. LD. AR FURTHER SUBMIT TED THAT ALL BOOKS OF ACCOUNTS WERE PRODUCED DURING ASSESSMENT PROCEEDING S AND DREW OUR 38 ATTENTION TO PAPER BOOK PAGE NO. 937 TO 938, BEING LETTERS SUBMITTED BEFORE A.O. PRODUCING BOTH HARD AND SOFT COPIES OF BOOKS O F ACCOUNTS OF THE ASSESSEE. LD. DR ON THE OTHER HAND RELIED UPON THE ORDER OF T HE A.O. AND STATED THAT MERELY BECAUSE BILLS WERE SUBMITTED DURING THE IMPU GNED ASSESSMENT YEAR, THE LIABILITY COULD NOT BE SAID TO HAVE CRYSTALLIZED IN THE IMPUGNED ASSESSMENT YEAR. LD. DR ARGUED THAT THE CLAIM OF PRIOR PERIOD EXPENS ES COULD NOT BE ALLOWED AS PER THE PROVISION OF SECTION 37(1) OF THE INCOME TA X ACT, 1961. WE FIND THAT THE CLAIM OF THE ASSESEE THAT CERTAIN PRIOR PERIOD EXPENSES WERE NOT CLAIMED AS EXPENSE DURING THE YEAR, BUT WERE IN FACT ROUTED THROUGH THE PROVISION ACCOUNT, BY VIRTUE OF SAP SYSTEM, HAS N EITHER BEEN CONSIDERED NOR EXAMINED BY THE AUTHORITIES BELOW. THEREFORE AO IS DIRECTED TO VERIFY THIS FACT AND IF IT IS FOUND THAT SUCH AMOUNT HAS NOT BEEN CL AIMED AS DEDUCTION DURING THE YEAR NO DISALLOWANCE CAN BE MADE IN RESPECT OF SUCH NON-CLAIMED DEDUCTION. IN CASE ANY SUCH AMOUNT IS CLAIMED AS DE DUCTION, PLEA OF THE ASSESSEE THAT LIABILITY IN RESPECT OF SUCH EXPENSES HAS CAPITALIZED IN THE YEAR UNDER APPEAL SHOULD ALSO BE EXAMINED AS ASSESSING O FFICER HAS NOT DEALT WITH THIS ARGUMENT OF THE ASSESSEE THOUGH SPECIFICALLY R AISED. AO SHALL GIVE OPPORTUNITY OF HEARING TO THE ASSESSEE AND DECIDE T HE ALLOWABILITY OF DEDUCTION IN ACCORDANCE WITH LAW AND IN THE LIGHT OF ABOVE ME NTIONED DIRECTION. CERTAIN EXPENSES HAVE BEEN DISALLOWED FOR WANT OF S UPPORTING VOUCHERS / BILLS. LD. AR ARGUED THAT DUE TO PAUCITY OF TIME, THE SAME COULD NOT BE SUBMITTED BEFORE THE A.O. AND THE ASSESSEE HAD REQUESTED FOR FURTHER TIME TO SUBMIT THE SAME. LD. AR DREW OUR ATTENTION TO THE LETTER WITH BY THE ASSESSEE TO THE A.O. ASKING FOR TIME TO PLACE THE NECESSARY VOUCHERS AT PAPER BOOK PAGE NO. 1097. LD. AR FURTHER SUBMITTED THAT ALL RELEVANT VOUCHERS ARE PLACED BEFORE THE HONBLE DRP AS ADDITIONAL EVIDENCE WHICH WAS NOT AD MITTED WITHOUT GIVING ANY REASON AT ALL. LD. AR FURTHER SUBMITTED THAT ALL EX PENSES PERTAINED TO THE BUSINESS 39 OF THE ASSESSEE AND WERE ALLOWABLE U/S 37(1) OF THE ACT. LD. DR ON THE OTHER HAND STATED THAT SINCE THE EXPENSES WERE NOT PROPER LY SUPPORTED BY BILLS, THE CLAIM OF THE ASSESSEE OUGHT NOT TO BE ENTERTAINED. WE FIND THAT ON 25.03.2014 THE ASSESSEE HAD ASKED T HE AO FOR MORE TIME TO SUBMIT ALL VOUCHERS AND SUPPORTING BILLS WHICH WERE FOUND DEFECTIVE IN THIS RESPECT. THEREAFTER WITHOUT GIVING ANY FURTHER OPPO RTUNITY TO THE ASSESSEE THE DRAFT ORDER WAS PASSED ON 26.03.2014. BEFORE THE HO NBLE DRP THE ASSESSEE PLACED ALL THE RELEVANT VOUCHER AS ADDITIONAL EVIDE NCE BUT WE FIND THAT THE HONBLE DRP HAS NOT DEALT WITH THE ADMISSION OF ADD ITIONAL EVIDENCE AT ALL IN ITS ORDER. IN VIEW OF THE SAME WE FIND THAT THE ADEQUATE OPPOR TUNITY WAS NOT GIVEN TO THE ASSESSEE TO PRODUCE THE DOCUMENTS BEFORE THE A.O., WHICH MAY NOW BE SO PRODUCED AND AFTER EXAMINATION THEREOF THE ISSUE OF ALLOWANCE OF EXPENSES MAY BE ADJUDICATED UPON IN ACCORDANCE WITH LAW. WE THEREFORE REMIT THIS ASPECT ALSO TO THE FILE OF THE A.O. FOR EXAMINING T HE SAME AND THEREAFTER DECIDE THE ISSUE AFRESH IN ACCORDANCE WITH LAW. CERTAIN EXPENSES HAVE ALSO BEEN DISALLOWED FOR THE REASON THAT THE INVOICE AMOUNT DOES NOT TALLY WITH THE SUPPORTING VOUCHER. LD. AR SUBMITTED THAT THIS ISSUE WAS CLARIFIED TO THE A.O. WHEREIN IT WAS EXPL AINED THAT IN CERTAIN CASES A SINGLE PURCHASE ORDER IS MADE FOR MATERIALS /PRODUC TS / ITEMS REQUIRED BY DIFFERENT DEPARTMENTS OF THE ASSESSEE AND IN PURSUA NCE TO WHICH THE MATERIAL IS SUPPLIED BY THE VENDOR RAISING A SINGLE BILL, SOMET IMES WITHOUT MENTIONING THE PO REFERENCE NO. THE SAP SYSTEM OF THE ASSESSEE, THERE AFTER, POSTS THE PURCHASES IN THE RESPECTIVE LEDGER ACCOUNTS WHEREIN THE PURCHASE S ACCOUNTED FOR DO NOT TALLY WITH THE CONSOLIDATED FIGURE MENTIONED IN THE PURCHASE ORDER. LD. AR STATED THAT RELEVANT PURCHASE ORDER AND INVOICES WE RE ALSO PLACED BEFORE THE A.O. 40 WE FIND THAT DESPITE THE SUBMISSIONS AND EVIDENCES PLACED BY THE ASSESSEE BEFORE THE ASSESSING OFFICER, THE SAME HAS NEITHER BEEN CONSIDERED NOR EXAMINED BY HIM. MOREOVER WE FIND THAT THE DRP ALSO FAILED TO CONSIDER THE SUBMISSION OF THE ASSESSEE. IN VIEW OF THE SAME WE FIND NO JUSTIFICATION IN THE ORDER OF THE A.O. MAKING THE DISALLOWANCE WITHOUT A PPRECIATING THE SUBMISSIONS MADE BY THE ASSESSEE AND THE EVIDENCES FILED BY IT. BUT IN THE INTEREST OF JUSTICE WE REMIT THE MATTER BACK TO THE FILE OF THE A.O. TO EXAMINE THE ISSUE AFRESH IN THE LIGHT OF SUBMISSIONS AND EVIDENCES PLACED BY TH E ASSESSEE AND THEREAFTER ADJUDICATE THEREON IN ACCORDANCE WITH LAW. THE ASSE SSING OFFICER IS DIRECTED TO GIVE ADEQUATE OPPORTUNITY OF HEARING TO THE ASSESSE E IN RESPECT OF THE ABOVE ISSUES. 61. IN VIEW OF THE ABOVE THIS GROUND OF APPEAL OF T HE ASSESSEE IS ALLOWED, IN ABOVE TERMS. GROUND NO. 13: 62. THIS GROUND RAISED BY THE ASSESSEE IS AGAINST T HE DISALLOWANCE OF DEPRECIATION OF RS. 11,57,037 /- 63. BRIEF FACTS RELATING TO THE CASE ARE THAT DURIN G ASSESSMENT PROCEEDINGS WHILE EXAMINING THE DETAILS OF ADDITION TO FIXED AS SETS MADE DURING THE YEAR, IT WAS FOUND THAT THE ASSESSEE HAD CAPITALIZED CERTAIN CIVIL CONSTRUCTION EXPENSES UNDER THE HEAD PLANT & MACHINERY AMOUNTING TO RS. 2 ,31,40,744 /- AND CLAIMED DEPRECIATION @ 15% ON THE SAME. ON BEING CONFRONTED WITH THE SAME THE ASSESSEE SUBMITTED THE CIVIL CONSTRUCTION WORK HAD BEEN CAPITALIZED UNDER HEAD PLANT & MACHINERY SINCE THE SAME HAD BEEN INCURRED FOR BUILDING STRONG FOUNDATION AND STRUCTURE TO THE EXISTING FACTORY BU ILDING FOR THE PURPOSE OF INSTALLING NEW PLANT & MACHINERY. THE ASSESSEE SUBM ITTED THAT THE EXPENDITURE WAS INCURRED FOR INCORPORATING PARTICULAR FEATURES IN THE EXISTING FACTORIES WHICH WAS ESSENTIAL FOR INSTALLATION FOR THE FUNCTIONING OF PLANT & MACHINERY EQUIPMENT. 41 THUS, THE ASSESSEE PLEADED THAT THE CIVIL CONSTRUCT ION EXPENDITURE WAS AN INTEGRAL PART OF THE PLANT & MACHINERY. THE ASSESS EE FILED DETAILED SUBMISSIONS TO THIS EFFECT AND FURTHER PLACED RELIANCE ON A NUMBE R OF JUDICIAL DECISIONS IN SUPPORT OF ITS ABOVE CONTENTION. LD. AO REJECTING THE ASSESSEES CONTENTIONS HELD THAT THE CIVIL CONSTRUCTION WORK UNDERTAKEN BY THE ASSESSEE WAS PART OF THE BUILDING ENTITLED TO DEPRECIATION @10% AND SINCE TH E ASSESSEE HAD CLAIMED DEPRECIATION @ 15 % HOLDING THE SAME TO BE PLANT & MACHINERY, THE EXCESS DEPRECIATION OF 5% WAS PROPOSED TO BE DISALLOWED BY THE AO EQUIVALENT TO RS. 11,57,037/-. THE ASSESSEE DISPUTED THE PROPOSED ADD ITION BEFORE DRP WHO REJECTED THE OBJECTION OF THE ASSESSEE BY HOLDING A S FOLLOWS:- THE DRP CONSIDERED THE FACTS OF TIIE MATTER. ON A PERUSAL OF THE SUBMISSIONS MADE BY THE APPLICANT IT WAS NOTICED TH AT A MENTION OF A 'PLAN STRUCTURE' OF TABLA PROJECT OBTAINED FROM M/S B. ME HATALIA CONSULTANTS PVT LTD (ARCHITECT, CONSULTING ENGINEER AND INTERIOR DESIGN ERS) WAS MADE THEREIN. HOWEVER, THERE WAS NOT A WHISPER OF THE SAME IN THE DRAFT ASSESSMENT ORDER MEANING THEREBY THAT THE PIECE OF EVIDENCE SOUGHT T O BE RELIED ON BY THE APPLICANT AT THIS STAGE WAS NOT MADE AVAILABLE TO T HE AO AT THE TIME OF ASSESSMENT PROCEEDINGS. HENCE THE ARGUMENTS AND THE CASE LAWS RELIED ON BY THE APPLICANT ARE CONSIDERED TO BE IRRELEVANT TO THE FACTS AND CIRCUM STANCES OF THE CASE. BESIDES THE ABOVE THE BUILDING STRUCTURE IN THE INSTANT CAS E PLAYED NO PART IN THE CARRYING ON OF THE BUSINESS ACTIVITIES BUT MERELY CONSTITUTE D THE PLACE WHEREIN THEY WERE CARRIED ON THE BUILDING COULD NOT BE REGARDED AS A PLANT. THEREFORE, THE EXPENDITURE INCURRED ON ACCOUNT OF THE BUILDING WAS RIGHTLY NOT TREATED AS EXPENDITURE ON PLANT AND MACHINERY. THEREFORE, THE OBJECTION OF THE APPLICANT IS REJECTED. FOLLOWING THE SAME, LD. AO DISALLOWED DEPRECIATION OF RS. 11,57,037/- 64. AGGRIEVED BY THE SAME THE ASSESSEE FILED THE PR ESENT APPEAL BEFORE US. 65. BEFORE US LD. AR PLEADED THAT THE CIVIL WORK EX PENDITURE INCURRED BY THE ASSESSEE WAS FOR THE PURPOSE OF BUILDING STRONG FOU NDATION AND STRUCTURE TO THE EXISTING FACTORY BUILDING FOR THE PURPOSE OF INSTAL LING NEW PLANT & MACHINERY. LD.AR DREW OUR ATTENTION TO THE PLAN STRUCTURE OF T ABLA PROJECT TAKEN FROM B. MEHTALIA CONSULTANTS PVT. LTD. (ARCHITECTS, CONSULT ING ENGINEERING AND INTERIOR DESIGNER) WHEREIN DESCRIPTION OF STRUCTURE IN RESPE CT OF FOUNDATION AND GROUND WORK WAS GIVEN ALONGWITH EXPLANATION FOR THE AFORES AID PLAN STRUCTURE. LD. AR 42 DREW OUR ATTENTION TO PAGE NO. 1099-1102 WHEREIN TH E IMPUGNED PLAN STRUCTURE WAS PLACED. LD. AR FURTHER DREW OUR ATTENTION TO PB 1082 1085 WHEREIN DETAILED SUBMISSIONS WERE MADE BEFORE THE AO EXPLAINING THE NATURE OF CIVIL WORK CAPITALIZED IN PLANT & MACHINERY. LD. AR PLEADED TH AT THE BUILDING WAS EXPANDED AND THE CHANGES CARRIED OUT IN THE EXISTIN G BUILDING TO INSTALL HEAVY PLANT & MACHINERY TO ACCOMMODATE THE TABLA PROJECT. LD. AR STATED THAT THE IMPUGNED EXPENDITURE HAD BEEN INCURRED FOR THE SPEC IFIC PURPOSE OF INSTALLING PLANT & MACHINERY AND DID NOT RESULT IN THE ENHANCE MENT OF VALUE OF BUILDING. LD. AR FURTHER STATED THAT THE EXPENDITURE HAD BEEN CAPITALIZED AS PER THE PRESCRIBED METHOD OF ACCOUNTING FOR FIXED ASSETS EN UNCIATED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) IN ACCOUNTING STANDARD -10, WHICH STATED THAT ALL COST INCURRED TOWARDS SITE PREPARATION AND INSTALLATION INCLUDING SPECIAL FOUNDATION FOR PLANT WAS TO BE TREATED AS DIRECT CO ST OF SUCH FIXED ASSET. LD. AR FURTHER PLACED RELIANCE ON THE FOLLOWING JUDICIAL D ECISIONS IN SUPPORT OF ITS CONTENTIONS: CIT V. TAJ MAHAL HOTEL (1971) 82 ITR 44 CIT V. KARNATAKA POWER CORPORATION (2000) 247 ITR 2 68 CIT V. NAVODYA (2004) 271 ITR 173 (KAR.) (HC) NOWRANG ROY METAL LTD. V. JCIT (2003) 262 ITR 231 ( GAU.) AIRPORTS AUTHORITY OF INDIA V. CIT (2011) 16 TAXMAN N.COM 198 (DEL.) CIT V. DR. B. VENKATA RAO (2000) 243 ITR 812 CIT V. COROMANDEL FERTILIZERS LTD. (1984) 18 TAXMAN N.COM 451(AP) CIT V. HOTEL LUCIA 100 TAXMAN 438 (KER.) RC CHEMICALS INDUSTRIES V. CIT 9 TAXMAN 181 43 66. WE HAVE HEARD THE RIVAL SUBMISSIONS CAREFULLY A ND PERUSED THE MATERIAL ON RECORD PLACED BEFORE US. THE ISSUE BEFORE US IS WHETHER THE ASSESSEE HAS COR RECTLY TREATED THE CIVIL CONSTRUCTION UNDERTAKEN BY IT AS PLANT INSTEAD OF BUILDING AS CLAIMED BY THE AO FOR THE PURPOSE OF CLAIMING DEPRECIATION THEREON . IT IS NOT THE LAW THAT ANY CIVIL CONSTRUCTION WOULD ALWAYS BE TREATED AS BUILDING, AS SEEMS TO BE THE BELIEF AND APPROACH OF AO. A BU ILDING WHICH IS NOT MERELY A SPACE FROM WHERE BUSINESS IS CARRIED ON, BUT A MEAN S FOR CARRYING ON BUSINESS AND AN APPARATUS OR TOOL OF THE ASSESSEE, IS TO BE TREATED AS PLANT. WHERE A BUILDING IS CONSTRUCTED WITH A SPECIFIC DESIGN KEEP ING IN VIEW SPECIFIED TECHNICAL REQUIREMENTS WITHOUT WHICH THE ASSESSES BUSINESS CA NNOT BE CARRIED ON, THE BUILDING, WITHOUT ANY DOUBT, QUALIFIES TO BE TREATE D AS PLANT. 67. WE FIND THAT THE ASSESSEE HAD GIVEN A DETAILED EXPLANATION OF THE CIVIL WORK CAPITALIZED IN PLANT & MACHINERY, SPECIFYING T HE EXACT NATURE OF THE MODIFICATION CARRIED OUT TO THE EXISTING STRUCTURE FOR BUILDING STRONG FOUNDATION AND INSTALLING NEW PLANT & MACHINERY. THE EXPLANATI ON GIVEN BY THE ASSESSEE VIDE ITS LETTER DT. 23/03/2014 IS REPRODUCED HEREUN DER: 1. DETAILS OF CIVIL WORK CAPITALIZED IN PLANT AND MACHINERY. IN THIS REGARD, WE RESPECTFULLY SUBMIT THAT THE ASS ESSEE HAS INCURRED CIVIL WORK EXPENDITURE FOR BUILDING STRONG FOUNDATION AND STRU CTURE TO EXISTING FACTORIES BUILDING FOR THE PURPOSE OF INSTALLATION OF NEW PLA NT AND MACHINERY. IN ADDITION, IT ALSO EXTENDED THE EXISTING BUILDING WHEREIN NEW CON STRUCTION WAS UNDERTAKEN. THE COMPANY MADE CERTAIN MODIFICATION IN THE EXISTI NG BUILDING WITH PARTICULAR SPECIFIC FEATURES AND STANDARDS SO THAT HEAVY PLANT S AND MACHINERIES CAN BE INSTALLED. THE AIM OF THE TABLA PROJECT WAS TO INTR ODUCE ENZYMATIC TECHNOLOGY FOR THE PRODUCTION OF PURICILLIN AND PURIMOX IN THE ERS TWHILE JUMBO PLANT. TO INSTALL THE EQUIPMENTS FOR THIS CHANGE OVER, THE BUILDING HAD T O BE EXPANDED AS WELL AS A LOT OF CHANGES WERE CARRIED OUT IN THE EXISTING BUI LDING. SOME OF THE EXPANSIONS / MODIFICATIONS WHICH WERE CARRIED OUT ARE AS FOLLOWS : EXISTING CEPH-C BUILDING WAS MODIFIED FOR THE I NSTALLATION OF 1. ENZYMATIC REACTOR (PV101), 2. BUFFER VESSLES (PV105 & PV106) , 3. RECYCLE VESSEL (PV103, PV104), 4. PROCESS WATER SYSTEM, 44 5. PROCESS WATER STORAGE TANK (PT1501) FOR INSTALLATION OF THESE EQUIPMENTS, NEW FOUNDATIO NS HAD TO BE CREATED INCLUDING PILING, AND NEW FLOOR (106 METER) HAD TO BE CREATED. * EXISTING JUMBO BUILDING WAS MODIFIED FOR THE INST ALLATION OF THE FOLLOWING: 1. AGING VESSEL (PV303) 2. CRYSTALLISERS (PV 302 & PV 301) 3. BUFFER VESSEL (PV 801) 4. HCL, DOSING TANK (PT 201) 5. SPARKLER FILTERS 6. CAUSIE TANK (PT 301) 7. HEAT EXCHANGERS 8. STATIC MIXER THE FLOOR AT 108.5 METER WAS MODIFIED FOR THE INSTA LLATION OF THESE EQUIPMENTS- ROOM FOR INSTALLATION OF HOIST TO TRANSFER RAW MATE RIALS FROM THE GROUND FLOOR TO 110.65 METERS. STAIR CASE FOR ACCESS TO EQUIPMENT INSTALLED AT 104 METER, 106 METER, 108 METER AND 110.65 METER. RAW MATERIAL CHARGING ROOM AT 110.50 METER FOR INST ALLATION OF CHARGING EQUIPMENT AND SILO. INTERMEDIATE ML COLLECTION ROOM AT 100 LEVEL (GROUN D FLOOR) FOR INSTALLATION OF ML TANKS AND TRANSFER PUMPS. RAW MATERIAL STORAGE ROOM AT 100 LEVEL (GROUND FLOO R). PACKING MATERIAL CLEANING ROOM AT 100 LEVEL (GROUND FLOOR). IT IS USED FOR CLEANING THE PACKING MATERIAL BEFORE IT GOES TO MAI N PROCESS AREA TO AVOID ENTRY OF DUST. EXISTING JUMBO BUILDING WAS MODIFIED FOR THE INSTAL LATION OF LIQUID LIQUID EXTRACTORS (104 METERS). THE BUILDING HAD TO BE FINISHED UP TO PHARMA STANDA RDS WHICH INCLUDES EPOXY FLOORING, SPECIAL DOORS WITH DROP SEALS, JOI NT LESS KOTA STONE, FALSE ROOF FOR AVOIDING DUST AND TEMPERATURE SO THAT THE REQUIREMENTS OF THE PHARMACEUTICAL PRODUCT ARE MET. INVERTOR ROOM FOR INSTALLATION OF INVERTOR DRIVES. DCS CONTROL ROOM FOR INSTALLATION OF THE AUTOMATION SYSTEM FOR THE PLANT. AS MENTIONED ABOVE, THE COMPANY INCURRED CIVIL WORK S EXPENDITURE TOWARDS CERTAIN MODIFICATION IN THE EXISTING BUILDING AND E XTENSION OF EXISTING BUILDING FOR THE TABLA PROJECT. FOR THIS PURPOSE, THE COMPANY HA D ISSUED A SINGLE CONTRACT FOR BOTH INSTALLATION OF PLANT & MACHINERY AND EXTENSIO N OF BUILDING AND DID NOT ISSUE SEPARATE CONTRACTS FOR EACH OF THE ASSIGNMENTS. THE ASSESSEE COMPANY ALLOCATED THE EXPENDITURE INCURRED ON FOUNDATION WO RK AND BUILDING COST TOWARDS P&M AND BUILDING ON THE BASIS OF ITS MAJOR CONTRACTORS BILLS. FURTHER, WE WOULD LIKE TO SUBMIT THAT ENTIRE FOUNDATION WORK WA S DONE TO THE EXISTING BUILDING IN ORDER TO ACCOMMODATE THE NEW P&M. BASED ON AFORE SAID, THE COMPANY HAS ALLOCATED RS. 35,357,828/- AND 23,140,744 TOWARDS B UILDING AND PLANT & MACHIERY RESPECTIVELY. WE ENCLOSE THE PLAN STRUCTURE OF TABL A PROJECT TAKEN FROM B MEHTALIA CONSULTANTS PVT. LTD. (ARCHITECTS, CONSULT ING ENGINEERING AND INTERIORS DESIGNERS) AT ANNEXURE-1 WHEREIN DESCRIPTION OF STR UCTURE IN RESPECT OF FOUNDATION AND GROUND WORK IS GIVEN IN DETAIL. FURTHER, TO EXP LAIN THE AFORESAID PLAN STRUCTURE, WE GIVE BELOW THE EXPLANATION OF EACH OF THE STRUCT URE. MECHANICAL 103 M 104.5 M MODEL IT IS A LAYOUT DRAWING OF THE 3 METER AND 4.5 METER LEVELS. ON THE TOP LEFT OF PLAN LAYOUT PROVIDES THE DETAILS OF EQUIPMENT THAT WERE INSTALLED. EQUIPMENTS LIKE LIQUID I LIQUID EXTRACTORS, PROCESS WATER TANK, E NZYMATIC REACTOR (PV101), INVERTOR ROOM FOR SPEED CONTROL OF EQUIPMENTS, OTHER EQUIPME NTS LIKE PV 301, PV 302, PV 303 ETC WERE INSTALLED WHICH CAN BE SEEN IN THIS DR AWING. SPECIAL FOUNDATIONS WITH PILING WERE CREATED TO MAKE THE BUILDING STRON G ENOUGH TO TAKE THE LOAD OF EQUIPMENTS. MECHANICAL ROOM MODEL 45 IT IS A LAYOUT DRAWING OF THE GROUND FLOOR, ON THE TOP LEFT LIST OF EQUIPMENT WERE INSTALLED. RAW MATERIAL STORAGE ROOM, PACKING MATER IAL CLEANING ROOM, ML TRANSFER PUMP ROOM, CENTRIFUGES, DRYERS, HOIST ROOM WERE BUILT. SOME AREA HAS FALSE CEILING IN LINE WITH THE PRODUCT REQUIREMENTS . MECHANICAL 110.65M MODEL IT IS LAYOUT DRAWING OF THE TOP FLOOR IN WHICH THE RAW MATERIAL CHARGING EQUIPMENT, HOIST WHICH BRINGS RAW MATERIAL FROM THE GROUND FLOOR, AIR LOCKS, AHUS ETC WERE CONSTRUCTED. THE RAW MATERIAL CHARGING ROO M IS MADE OF SPECIAL BRICKS AND WALLS SO THAT THE WEIGHT OF THE BUILDING DOES N OT EXCEED THE BASIC DESIGN. MECHANICAL 106 M 108.50 M MODEL IT IS A LAYOUT DRAWING OF THE 6 METER AND 8.5 METER FLOORS. ON THE TOP LEFT LIST OF EQUIPMENT WERE INSTALLED. WE FURTHER PROVIDE THAT INSTALLATION OF PLANT AND M ACHINERY WOULD NOT BE POSSIBLE WITHOUT THE PARTICULAR FEATURES INCORPORATED IN THE EXISTING FACTORY. THE COMPANY HAS ALLOCATED ALL EXPENDITURE INCURRED FOR CONSTRUC TION OF NEW BUILDING AND CAPITALIZED THE SAME UNDER BUILDING. FURTHER, WE WOULD LIKE TO REITERATE THAT THE COMPAN Y HAS CERTAIN MODIFICATION IN THE EXISTING BUILDING WITH PARTICULAR SPECIFIC FEAT URES AND STANDARDS SOLELY FOR THE PURPOSE OF INSTALLATION OF PLANT & MACHINERY AND HA S THUS, CAPITALISED THE FOUNDATION EXPENSES TO PLANT & MACHINERY. IN THIS R EGARD, WE GIVE BELOW OUR LEGAL SUBMISSION AND PLACES RELIANCE ON THE FOLLOWING JUD ICIAL PRECEDENTS WHEREIN IT HAS BEEN HELD THAT STRUCTURE WITH SPECIAL FEATURES CAN BE CATEGORIZED UNDER PLANT AND MACHINERY. WE FIND THAT THE ABOVE DETAILED EXPLANATION OF THE ASSESSEE THAT THE CIVIL WORK UNDERTAKEN PERTAINED TO BUILDING REINFORCED FOUNDAT ION FOR THE PURPOSE OF INSTALLING NEW PLANT AND MACHINERY HAS NOT BEEN REB UTTED MUCH LESS WITH THE HELP OF ANY COGENT BASIS. THEREFORE SUCH REINFORCEM ENT EVEN TO CIVIL CONSTRUCTION WOULD BE TREATED AS INSTALLATION COST OF PLANT AND MACHINERY AND WOULD QUALIFY FOR DEPRECIATION AS PLANT AND MACHINE RY. IN VIEW OF THE SAME, WE ALLOW DEPRECIATION AMOUNTING TO RS. 11,57,037/- ON CIVIL CONSTRUCTION WORK IN THE FACTS OF THE PRESENT CASE AS APPLICABLE TO PLANT AN D MACHINERY. 68. THIS GROUND OF APPEAL OF THE ASSESSEE IS THEREF ORE ALLOWED. GROUND NO. 14 69. THROUGH THIS GROUND THE ISSUE OF INITIATION OF PENALTY PROCEEDINGS U/S 271(1)(C) HAS BEEN RAISED. 46 70. BOTH THE PARTIES AGREED THAT THIS IS PRE-MATURE AND DOES NOT REQUIRE SEPARATE ADJUDICATION. THEREFORE, WE HOLD THAT THIS IS PREMATURE ISSUE AND DOES NOT REQUIRE ANY ADJUDICATION. 71. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (BHAVNESH SAINI) (ANNAPURNA MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 04/12/2015 AG COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT, TH E CIT(A), THE DR